Partnership Firms In India

A Partnership is a relation between persons who have agreed to share profits of the business carried on by all or any of them acting for all. Partnerships are a very good form of business entity for small enterprises wherein more than one person decides to contribute to a partnership and share the profits. In India, Partnerships are widely prevalent because of their ease of formation and minimal regulatory compliance. In this article, we look at the types of partnership, advantages and process of registering a partnership firm.

Partnership Firm

There are two types of Partnership, registered Partnership and unregistered Partnership. In terms of the Indian Partnership Act, 1932, (Act), the only criterion to commence business as a partnership is the finalisation and execution of a Partnership Deed between the Partners. The Act does not require the Partnership Deed/Partnership Firm to register and in other words, does not require the Partnership Firm to register as a Firm. Therefore various partnership businesses exist as an unregistered Firm without impacting the business of the Firm.

There are no penalties for non-registration of a partnership firm and can register a partnership firm subsequently after formation. However, unregistered partnership firms have certain rights denied in Section 69 of the Partnership Act, which deals with the effects of non-registration of a partnership firm. Some of the disadvantages of an unregistered firm are:

A partner of an unregistered firm cannot file a suit in any court against the firm or other partners for the enforcement of any right arising from a contract or right conferred by the Partnership Act.
No suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered.
An unregistered firm or any of its partners cannot claim set-off or other proceedings in a dispute with a third party. Therefore, it is advisable for any partnership to register sooner or later.

Partnership Firm Registration

A person can register the partnership firm under Section 58 of the Indian Partnership Act at any time, even subsequent to the formation. The registration of a partnership firm is done by filing an application with the Firm Registrar of the area in which any place of business is situated or proposed to be situated. When the Registrar of Firms is satisfied that the provisions of Section 58 are duly complied with, a record of entry of the statement is made in the Register of Firms and Certificate of Registration is issued. The application for registration of Partnership Firm must contain the prescribed registration form for incorporation of a company, certified true copy of the Partnership deed entered into and ownership proof of the principal place of business.

Advantages of a Partnership Firm

One of the main advantages of a Partnership Firm is that there are very minimal requirements in terms of compliance. For instance, a Company requires the annual filing of its financial statements with the Registrar of Companies and the part of the financial statements of the Company are made public documents. On the other hand, registered/unregistered Partnership Firms are not required to file any annual returns / the Firms financial statements with any Regulatory body. Therefore, the financial statements of a Partnership Firm are not available in the public domain. Also, it does not require the audition of the accounts of a registered / unregistered Partnership firm. Whereas, audit the accounts of a Limited Liability Partnership when the turnover exceeds Rs.40 lakhs per annum or when capital contribution exceeds Rs. 25 lakhs.

Disadvantages of a Partnership Firm

Partnership firm does not provide its Partners with limited liability and does not have perpetual existence. Also, the interest of a Partner in a Partnership firm is not easily transferrable and the ownership structure is not conducive for Private Equity Investors. In addition to being tougher (almost impossible) to obtain private equity investment in a partnership firm, it is also harder for Partnership Firms to obtain loans from Banks & Financial Institutions. Banks / Financial Institutions prefer to lend to Companies than Partnership Firms as Companies are separate entities and the regulatory requirement for financial reporting of Companies, makes Companies more transparent and structured.

Partnership Firm Taxation

The accessing of Partnership firms is either as a partnership firm or as an association of persons(AOP). Interest paid to partners, salary, bonus, commission, or remuneration to a partner will be allowed as a deduction if it is paid to a working partner who is an individual when the partnership is assessed as a Partnership Firm. However, when the Partnership Firm is assessed as an AOP, the above deductions cannot be claimed. Therefore, for a partnership firm, it is more advantageous to assess as a partnership firm than as an AOP. For a Firm to be assessed as a Partnership Firm, the Partnership Firm should be evidenced by a written partnership deed, individual shares of the partners should be very clearly specified in the deed and a certified copy of partnership deed must accompany the return of income of the firm of the previous year in which the partnership was formed.

To register a Partnership Firm in India, visit IndiaFilings.com

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Frequently Asked Questions

A partnership firm is a business entity formed by two or more individuals who agree to share the profits, losses, and management of the business. It is governed by the Indian Partnership Act, 1932.

The two types of partnership firms in India are registered partnership firms and unregistered partnership firms. Registration of a partnership firm is optional under the Indian Partnership Act, 1932.

Registering a partnership firm allows the partners to file suits against the firm or other partners, to enforce contractual rights, and to claim set-off or other proceedings in disputes with third parties.

A partnership firm can be registered by filing an application with the Registrar of Firms in the area where the business is situated or proposed to be situated. The application must include the prescribed registration form, a certified copy of the partnership deed, and proof of ownership of the principal place of business.

Partnership firms have minimal compliance requirements compared to companies. They are not required to file annual returns or financial statements with any regulatory body, and their financial statements are not available in the public domain. Additionally, auditing of accounts is not mandatory for partnership firms.

Partnership firms do not provide limited liability to their partners, do not have perpetual existence, and the ownership structure is not conducive for private equity investors. It is also harder for partnership firms to obtain loans from banks and financial institutions compared to companies.

A partnership firm can be assessed as a partnership firm or as an association of persons (AOP) for taxation purposes. If assessed as a partnership firm, interest, salary, bonus, commission, or remuneration paid to working partners can be claimed as a deduction, which is not allowed if assessed as an AOP.

To be assessed as a partnership firm for tax purposes, the firm should have a written partnership deed, individual shares of partners should be clearly specified in the deed, and a certified copy of the partnership deed must be submitted with the firm's income tax return for the year in which the partnership was formed.

No, an unregistered partnership firm cannot file a suit to enforce a right arising from a contract against a third party, as per Section 69 of the Indian Partnership Act, 1932.

No, auditing of accounts is not mandatory for partnership firms in India, whether registered or unregistered. However, auditing is mandatory for Limited Liability Partnerships (LLPs) if their turnover exceeds Rs. 40 lakhs per annum or if their capital contribution exceeds Rs. 25 lakhs.