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Partnership

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Easy to form:

Like sole proprietorships, partnership businesses can be formed easily without any compulsory legal formalities. It is not necessary to get the firm registered. A simple agreement or partnership deed, either oral or in writing, is sufficient to create a partnership. Note: Registration of the partnership is voluntary in most states. However it would be best to check up the rules of your state to be sure.



Availability of large resources:

Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship. The partners can contribute more capital, more effort and more time for the business.



Better decisions:

The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict, they can sit together to solve the problem. Since all partners participate in the decision-making process, there is less scope for reckless and hasty decisions.



Flexibility in operations:

A partnership firm is a flexible organization. At any time, the partners can decide to change the size or nature of the business or area of it’s operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.



Sharing risks:

In a partnership firm all the partners “share” the business risks. For example, if there are three partners and the firm makes a loss of Rs.24,000 in a particular period, then all partners may share it and the individual burden will be Rs.8000 only. Because of this, the partners may be encouraged to take up more risk and hence expand their business more.



Protection of interest of each partner:

In a partnership firm, every partner has an equal say in decision making and the management of the business. If any decision goes against the interest of any partner, he can prevent the decision from being taken. In extreme cases an unsatisfied partner may withdraw from the business and can dissolve it. In such extreme cases the “partnership deed” is required. In absence of the partnership deed, no legal protection is given to the partners.



Benefits of specialization:

Since all the partners are owners of the business, they can actively participate in every aspect of business as per their specialization, knowledge and experience. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, and another in labour cases and so on as per the individual specialization. Similarly, two or more doctors of different specialization may start a clinic in partnership.



Requirements & Process for Partnership:

Partnership and Proprietorship are the 2 most popular forms of business organisations in India. The reason why these 2 forms of organisations are so popular is because they are relatively easy to set-up and the no. of statutory compliance required to be done by these forms of organisations is relatively less than the statutory compliance applicable to LLP’s and Companies.

STEP 1 - Choosing the Partnership Name:

The partners are free to choose any name as they desire for their partnership firm subject to the following rules:

  1. The names must not be too identical or similar to the name of another existing firm doing similar business so as to lead to confusion. The reason for this rule being that the reputation or goodwill of a firm may be injured, if a new firm could adopt an allied name.
  2. The name must not contain words like Crown, Emperor, Empress, Empire or words expressing or implying the sanction, approval or patronage of Govt except when the State Govt signifies its consent in writing to the use of such words as part of the firm name.
Step 2 – Create Partnership Deed

The document in which the respective rights and obligations of the members of a partnership is written is called the Partnership Deed.
A partnership deed agreement may be written or oral. However, practically oral agreement does not have any value for tax purposes and therefore the partnership agreement should be written. The following are the essential characteristics of a partnership deed:

  • Name and Address of the firm as well as all the partners
  • Nature of business to be carried on
  • Date of Commencement of business
  • Duration of Partnership (whether for a fixed period/project)
  • Capital contribution by each partner
  • Profit sharing ratio among the partners

The above are the minimum essentials which are required in all partnership deeds. The partners may also mention any additional clauses. Some of the examples of additional clauses which may be mentioned in the partnership deed are mentioned below:

  • Interest on Partner’s Capital, Partners’ Loan, and Interest, if any, to be charged on drawings.
  • Salaries, Commissions etc, if any, payable to partners
  • Method of preparing accounts and arrangement for audit
  • Division of task and responsibility i.e. the duties, powers and obligations of all the partners.
Rules to be followed in case of retirement, death and admission of a partner

The Partnership Deed created by the partners should be on a stamp paper in accordance with the Indian Stamp Act and each partner should have a copy of the partnership deed. A Copy of the Partnership Deed should also be filed with the Registrar of Firms in case the firm is being registered.