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What is a Partnership Firm: Features, Types, and Everything You Need to Know

Partnership Firm

The Indian economy and law present entrepreneurs with several options when it comes to forming a business. Partnership firms are one of the most popular choices amongst the business organisations accessible due to the benefits they bring. Partnership firm registration is a vital process to establish the legal validity of a commercial partnership in India.
The procedure of partnership firm registration occurs whenever two or more persons sign an agreement to run a business jointly and share the earnings and losses it makes. Hence, entrepreneurs need to be aware of what is a partnership firm.
So, this post will help everyone who is looking to form a partnership firm and want to discover how to go about it. Let’s begin by understanding what a partnership firm is, how many different types there are, and how they differ from one another.

What is a Partnership Firm?

A partnership firm is created when two or more persons unite together and pool resources to establish a business. Partnership businesses’ main goal is to make money. The Indian Partnership Act of 1932 defines the laws that apply to partnership firms in the country.
Section 4 of the Partnership Act defines a partnership as “the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” Individuals who form a commercial partnership with another person are referred to as “partners” and as a group, they form a “firm.” According to the Indian Partnership Act, the name they give their business to conduct operations is referred to as the “firm name”.
Unlike its members, a partnership firm is not a separate legal entity. It is only the label given to the group of people who make it up. Thus, a firm cannot own property, hire servants, or be a debtor or a creditor, unlike a company that has a separate legal body that is independent of its members. It is not capable of suing or being sued.
Terms like “firm’s property,” “employee of the firm,” “suit against the firm,” and so forth are only used in commercial contexts for the sake of convenience. However, in the eyes of the law, these terms simply refer to “property of the partners,” “employees of the partners,” and “a suit against the partners of that firm.”
It is important to note that a partnership firm is an entity completely different from the partners who make up it and is assessable separately for tax purposes. But because a partnership firm lacks a distinct legal entity of its own, they are treated equally under all other rules.

Features of Partnership Firm

A business is considered a partnership business if it satisfies the standards outlined in the Indian Partnership Act.

1. Contract or agreement

A contract or agreement between the partners is the first and most important condition of a partnership firm before it can be established. This agreement between the partners is what sets such a company apart from a family business.
Unless otherwise specified in the contract, the next of kin of a deceased partner does not automatically become a partner.

2. For-profit business

Running a partnership firm must have profit as its primary goal. A partnership company needs to offer goods or services that will bring in money for the partners.
A non-profit organisation founded by two or more people won’t be regarded as a partnership firm.
Additionally, the partners in a partnership firm should split the earnings earned according to the terms of the contract.

3. Business operation

Every partner in a partnership firm has the authority to make decisions that are in the best interests of both the company and the individual partners. According to the Partnership Act, each partner must have the authority to decide both for himself and on behalf of the other partners.

Partnership Firm

Types of Partnership Firms

1. Partnership at will

Each partner in a partnership firm jointly agrees on the duration of the partnership at the time of formation. When the closing date draws near, they can also choose to prolong the tenure. However, all of this must be decided in advance.
Partnership at will refers to a partnership firm that is formed without specifying a particular duration for the partnership.
Individual partners in a “partnership at will” can jointly decide at a later time, if the need arises, when to dissolve the partnership. In such a partnership, the company’s profit is seen as the income of each individual partner.
Each partner pays taxes on this revenue, and they are all liable for paying off the business’s debts.

2. Particular partnership

A “particular partnership” is defined by the Indian Partnership Act as one where the parties agree upon an end date for the partnership. They may choose to end the partnership at that time, rather than establishing a set date if they decide so.
A specific partnership firm is usually established to complete a project and is temporary in nature.
The partners may, however, choose to postpone the partnership’s dissolution date. Examples of such a relationship include cooperating on a government initiative or a feature film.
Liabilities of the business must be met by each partner in a specific partnership. To pay off the company’s debts, they could have to use their own money and assets.

3. Limited liability partnership

The Limited Liability Partnership Act of 2008 governs a business organised as a Limited Liability Partnership (LLP).
The LLP operates as a corporate organisation, in contrast to the first two forms of partnerships. Partners’ limited liability in an LLP is based on how much money they have invested in the business.
An LLP’s partners are not required by law to use their own assets to pay off the business’s debts.

Difference between Firm and Company

The following are the differences between a firm and a company:

Basis

Firm
Company
Legal Status
Firms are not legal entities. Therefore, it lacks a legal personality distinct from that of its constituent members.
A company is regarded as a separate legal entity from its members.
Agency
In a firm, each partner acts as an agent for the other and for the firm.
A member of a company is neither the agent of another member nor the company itself. The activities of a member do not bind either.
Distribution of Profits
The profits of a firm must be divided among the partners in accordance with the partnership agreement.
There are no requirements for profit distribution among members. When dividends are announced, a portion of profits becomes available for distribution to shareholders.
The extent of Liability
In a partnership, the partners’ liability is unlimited. This means that each partner is responsible for the firm’s debts incurred during company operations. If the joint estate is insufficient to meet all of the obligations, these debts may be recouped from a partner’s private property.
In a company limited by shares, a shareholder’s liability is limited to the amount, if any, still owed on his shares. In the case of a guarantee company, the shareholder’s liability is restricted to the sum agreed upon. However, there may be businesses in which a member’s liability is unlimited.
Property
The property of the firm is the so-called “Joint Estate” of all the partners. It does not legally belong to anyone other than its members.
In a company, the company’s property is distinct from that of its members, who can only receive it back in the form of a dividend or a return of capital.
Transfer of Shares
A stake in a partnership cannot be transferred to another person or partner without the approval of every partner.
Subject to the rules of the company’s Articles, a shareholder may transfer his shares. Typically, the transfer of shares in a public limited company whose shares are traded on a stock exchange is regulated.
Management
If there is no explicit agreement to the contrary, all partners are eligible to participate in the control of the business.
Members of the company cannot participate in management unless they are appointed as directors. In this circumstance, they may participate. Members have the right to attend general meetings and vote on certain issues such as the election of directors and appointment of auditors, among others.
A number of members
For firms operating in industries other than banking, the number cannot exceed 20. This value must not exceed 10 for banks.
A private company may have no less than 2 or more than 50 members. A public business may have any number of shareholders, but no fewer than 7.
Duration of existence
If there is no agreement to the contrary, the death, retirement, or insolvency of a partner will result in the dissolution of the business.
Having eternal succession is advantageous for a company.
Audit
The audit of a firm’s financial statements is optional.
The auditing of a company’s financial statements is mandatory.

Types of Partners

The distinct classes of partners in a partnership firm can be determined by the amount of their liability.

1. Active/ actual/ ostensible partner

When a partner of a partnership business, who has become a partner by contract, actively participates in the partnership’s management.
The partner of the firm acts as the representative of the other partners for all actions performed within the typical business lifecycle. In the event of a partner’s retirement, he or she must provide a public notice to absolve themselves of responsibility for actions committed by the other partners following his departure.

2. Sleeping or dormant partner

A Dormant or Sleeping Partner is a partner who is a partner by agreement but does not actively participate in the business’s operations.
These partners share earnings and losses and are liable to third parties for the partnership’s commercial dealings. However, they are not compelled to announce their retirement from the partnership firm to the public.

3. Nominal partner

A nominal partner is a person whose name appears on the partnership document. When this is done without having an actual stake in the business, the individual is considered a nominal partner. This type of partner is not entitled to a portion of the firm’s profits. This partner has neither invested in nor participated in the firm’s business operations. However, such a partner is liable to third parties for all of the firm’s conduct.

4. Partner only in profits

This partner is entitled to a portion of the earnings but is not responsible for the losses. This type of partner is only liable to third parties for acts of profit.

5. Sub-partner

A Sub-partner is a partner in a partnership firm who agrees to split his profits with a non-partner. A sub-partner has no rights against the firm and is not responsible for any obligations incurred by the firm.

6. Incoming partners

This refers to a partner who is admitted as a partner into an existing firm with the approval of all current partners. This partner is not accountable for any actions the firm committed prior to his admission as a partner.

7. Outgoing partner

A departing partner is a partner who leaves the business while the remaining partners continue to operate. Until a public announcement is made regarding his retirement, this partner is accountable to third parties for any activities conducted by the firm.

8. Partner by estoppel (holding out)

By estoppel, a person will be legally regarded as a partner if he or she verbally or in writing informs a client that he or she is a partner and then receives credit or some other favour.

Partnership Firm

Partnership Deed Meaning

Although a partnership deed is not compulsory for the formation of a partnership business, it is preferable for legal reasons.
A partnership deed is a legal document that contains the terms and conditions of the firm, the partners’ connection, their responsibilities, the ratio of profit sharing, etc.

These are some advantages of forming a partnership deed:

  • Protects the legal rights of each partner
  • Describes the profit or loss ratio for each partner
  • Assists in obtaining PAN in the company’s name
  • GST registration for the company becomes simpler
  • Can submit an FSSAI licence application in the company’s name.

Conclusion

Thus, setting up a partnership firm and registering it is easy. There are many advantages of having a partnership firm. You can begin your business as a partnership with savvy and enthusiastic partners. Profit and loss sharing contributes to long-term stability. It also provides a competitive edge since the combined strengths and resources of two or more partners can provide superior results. If you too have a company idea, you should identify partners that share your aims and vision and have the necessary means, then form a partnership to implement your plan and generate profits.

FAQs

1. Is it essential to register a Partnership Firm?

Ans: It is not mandatory by law to register a partnership firm. However, it is preferable to register the business as a partnership in order to enforce the partners’ interests in court, if necessary.

2. Which act of the Indian constitution applies to the registration of the partnership deed?

Ans: Partnership agreements are governed under the Partnership Act of 1932.

3. What is the maximum number of partners in a partnership?

Ans: A minimum of 2 and a maximum of 20 individuals may form a partnership firm.

4. What occurs in the event of a partner’s demise?

Ans: Upon the passing of a partner, the partnership automatically dissolves.

5. How old must a person be to become a partner in the business?

Ans: The minimum age for registering as a partner is 18.

6. What is the minimum amount of capital required to register a partnership?

Ans: No minimum amount of capital is compulsory to register a partnership firm.

7. What is a partnership deed?

Ans: A partnership deed is a legal document that contains the terms and conditions of the firm, the partners’ connection, their responsibilities, the ratio of profit sharing, etc.

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