Partnership Firm

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Partnership Firm in India

A partnership firm is an organization which is formed with two or more persons to run a business with a view to earn profit. Each member of such a group is known as partner and collectively known as partnership firm. These firms are governed by the Indian Partnership Act, 1932.
Following are the characteristics of Partnership Firm:
1. Number of Partners : Minimum number of person required to start a partnership firm is two and maximum limit is 10 in case of banking business and 20 in case of all other types of business.
2. Contractual relationship : A written agreement known as partnership deed which is signed by all the partners, binds them in a contractual relationship.
3. Voluntary Registration : Registration of partnership firm is not compulsory. Since the registration provides various benefits to the firm thus it is desirable.
4. Competence of Partners : Every partner must be competent enough to enter into the partnership agreement. He should not be minor (in some cases minor can be admitted only to the benefits of the partnership), lunatic or insolvent.
5. Sharing of Profit and Loss : In partnership firm all the profits and losses are shared by the partners in any ratio as agreed. If it is not given then they share it equally.
6. Unlimited Liability : Liability of partners of a partnership firm is unlimited. They are jointly held liable for the debts and losses of the firm.
7. Legal Status : Partnership firm has no distinct legal status separate from its partners.
8. Transfer of Interest : No partner can transfer its interest in the firm to anybody without the consent of other partners.
9. Principal - Agent Relationship: This relationship is based on mutual trust and faith among the partners in the interest of the firm. Business of the firm may be carried on by all the partners or any one of them acting for all. According to this, every partner is an agent when he is working on behalf of other partners and he is the principal when other partners act on his behalf

Advantages of Partnership Firm:
1. Easy Formation : Registration is not compulsory in the case of Partnership firm. It can be formed without any legal formality and expenses. Thus they are simple and economical to form and operate.
2. Larger Resources : Due the more number of members the partnership firm has larger resources for the business
3. Flexibility in operation : Due to the limited number of partners there is flexibility in the operations of business as the partners can amend any objectives or change any operations any time by mutual consent.
4. Better Management : Business of a partnership firm is very well managed by all the partners as they take interest in the daily affairs of business because of the ownership, profit and control.
5. Sharing of Risk : In partnership every partner bears the risks individually as it is easier compared to sole proprietorship.
6. In a partnership firm interest of every partner is protected against any fraud.

How to form Partnership Firm?
Name given to the Partnership firm
Any name can be given to a partnership firm as long as you fulfill the below-mentioned conditions:
- The name shouldn't be too similar or identical to an existing firm doing the same business.
- The name shouldn't contain words like emperor, crown, empress, empire or any other words which show sanction or approval of the government.

How should be the agreement between partners formed?
Partnership deed is an agreement between the partners in which rights, duties, profits shares and other obligations of each partner is mentioned. Partnership deed can be written or oral, although it is always advisable to write a partnership deed to avoid any conflicts in the future.

Following details are required in a partnership deed:
A. General Details:
1. Name and address of the firm and all the partners
2. Nature of business
3. Date of starting of business Capital to be contributed by each partner
4. Capital to be contributed by each partner
5. Profit/loss sharing ratio among the partners
B. Specific Details:
Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a later stage:
1. Interest on capital invested, drawings by partners or any loans provided by partners to firm
2. Salaries, commissions or any other amount to be payable to partners
3. Rights of each partner, including additional rights to be enjoyed by the active partners
4. Duties and obligations of all partners
5. Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of firm.
6. Other clauses as partners may decide by mutual discussion

Is it necessary to register a partnership firm?
Indian Partnership Act, 1932 governs the partnerships. Registration of partnership firm is optional and at the discretion of the partners. Registration of partnership firm may be done at any time – before starting a business or anytime during the continuation of partnership. It is always advisable to register the firm since a registered firms enjoy special rights which aren’t available to the unregistered firms.

How to register the partnership firm?
An application form along with fees is to be submitted to Registrar of Firms of the State in which firm is situated. The application has to be signed by all partners or their agents.

Documents to be submitted to Registrar are
- Application for registration of partnership (Form 1)
- Specimen of Affidavit
- Certified original copy of Partnership Deed
- Proof of principal place of business (ownership documents or rental/lease agreement)
If the registrar is satisfied with the documents, he will register the firm in Register of Firms and issue Certificate of Registration.