How to Start "Partnership Firm" in India

"Partnership Firms" in India

A partnership is a business entity having two or more owners. Earnings are distributed according to the partnership agreement and are treated as personal income for tax purposes. Thus, like the sole proprietorship, the partnership is simply a conduit for directing income to its partners.

Steps to form Partnership Firm in India

• In India, a partnership firm can a maximum number of 20 partners.
• Partnership Firm is formed by formally written Partnership Deed which is signed by all the partners with witnesses. Usually, Partnership Deed is written on Rs. 500/- stamp paper.
• A Partnership Deed can be altered (for admission of new partner, retirement of existing partner) any number of times only by written instrument on Rs. 500/- stamp paper.
• Partnerships are governed by "Indian Partnership Act, 1932" in India.
• It is not mandatory to register partnership firm with "Registrar of Firms". The disadvantage of non registering is that an unregistered partnership firm cannot sue anybody in its own name.
• Registration formalities are quite simple with basic documentation required like certified copy of partnership deed, ID & Address Proofs of partners, Address Proof of Principle Place of business of the Firm etc.
• Unlike Sole Proprietorship, the Partnership is separately assessed in the Income Tax. You will have to apply for a separate PAN number for a Partnership Firm in addition to the existing PAN numbers of all the partners.

Partnership has a unique liability situation. Each partner is jointly and severally liable. Thus, a damaged party can sue a single partner or any number of partners- and that claim may or may not be proportional to the invested capital of the partners or the distribution of the earnings. This means that if the one partner did something to damage acustomer, that customer could sue all the partners even though other partner played no part in the problem.

Organizing a partnership is not as effortless as with a sole proprietorship. The partners must determine, and should set down in writing, their agreement on a number of issues:The amount and nature of their respective capital contributions (e.g., one partner might contribute cash, another a patent, and a third property and cash)

• How the business’s profits and losses will be allocated
• Salaries and draws against profits
• Management responsibilities
• The consequences of withdrawal, retirement, disability, or the death of a partner
• The means of dissolution and liquidation of the partnership

Advantages of a Partnership

Partnerships have many of the same advantages of the sole proprietorship, along with others:

• It is the simplest form for two or more persons to enter into a business together.
• Except for the time and the legal cost of crafting a partnership agreement, it is easy to establish.
• Because there is more than one owner, the entity has more than one pool of capital to tap in financing the business and its operations.
• Profits from the business flow directly to the partners personal tax returns; they are not subject to a second level of taxation.
• The entity can draw on the judgment and management of more than one person. In the best cases, the partners will have complementary skills.

Disadvantages of a Partnership

As mentioned earlier, partners are jointly and severally liable for the actions of the other partners. Thus, one partner can put other partners at risk without their knowledge or consent. Other disadvantages include the following:

• Profits must be shared among the partners.
• With two or more partners being privy to decisions, decision making may de slower and more difficult than in a sole proprietorship. Disputes can tie the partnership in knots.
• As with a sole proprietorship, the cost of some employee benefits may not be deductible from income taxation.
• In India partnership firms are taxed at a higher rate than proprietorship firms.