Partnership Firm

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A Partnership firm is a business entity created by persons who have agreed to share profits or loss of the business. Partnerships are a very good choice of business entity for small enterprises wherein two or more persons decides to contribute to a business and share the profits or losses. In India, Partnerships are widely prevalent because of its ease of formation and minimal regulatory compliance. Also, the concept of LLP was introduced only in 2010, whereas the Partnership Act, 1932 has been in existence before the independence of India. Hence, partnership firms are the most prevalent type of business entity wherein a group of people are involved.
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Incorporating a Company as 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 be registered and in other words, does not require the Partnership Firm to be a registered Firm. Therefore various partnership businesses exist as an unregistered firm.

There are no penalties for non-registration of a partnership firm, and a partnership firm can even be registered 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 an agreement can 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, any partnership should be registered sooner or later.

Cost: The cost for registration of LLP is normally higher than the cost for registration of a partnership firm. LLP registration can be completed online through IndiaFilings at just Rs.5899. Partnership registration can be completed online through IndiaFilings at just Rs.5899.

Authority: LLPs are registered in India under the Ministry of Corporate Affairs, Central Government. Partnership firms are registered with the Registrar of Firms, Controlled by the respective State Government in which the firm is registered.

Limited Liability Protection: The main advantage of a Limited Liability Partnership over a traditional partnership firm is that in an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. An LLP also provides limited liability protection for the owners from the debts of the LLP. However, unlike private limited company shareholder, the partners of an LLP have the right to manage the business directly.

Number of Partners: LLPs and Partnership Firms must have a minimum of two partners to be registered. Post incorporation, an LLP can have unlimited partners. In case of a Partnership Firm, if the number of partners at any time reduces below the mandatory minimum of 2 due to death, incapacitation or resignation of a Partner, the partnership firm would stand dissolved. On the other hand, in case of an LLP, if the number of Partners reduces below 2, the sole Partner can still find a new Partner to fill the position without dissolution of the LLP.

One of the main advantages of a Partnership Firm is that there are very minimal requirements in terms of compliance. For instance, a Company or LLP requires the annual filing of its financial statements with the Registrar of Companies. Such documents filed with the MCA are also made public documents. On the other hand, registered/unregistered Partnership Firms are not required to file any annual returns, and the financial statements of a partnership firm would NOT be made publicly available. Also, the accounts of a registered / unregistered partnership firm are not required to be audited. Whereas, the accounts of a Limited Liability Partnership (LLP) are required to be audited by a practising Chartered Accountant when the turnover exceeds Rs.40 lakhs per annum or when capital contribution exceeds Rs. 25 lakhs.
Partnership firm does not provide its Partners with limited liability protection and does not have perpetual existence. Also, the interest of a Partner in a Partnership firm is not easily transferrable, and the ownership structure does not allow for investment from Angel Investors, Venture Capitalists or Private Equity Firms. Banks / Financial Institutions also prefer to lend to Companies than Partnership Firms as Companies are separate entities and the regulatory requirement for financial reporting of Companies – makes a company more transparent and structured.

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Documents Required

Pan Card

PAN Card of shareholders and Directors. Foreign nationals must provide a valid passport.

Identity Proof

Aadhar card | Voter ID | Passport | Driving License of Shareholders and Directors.

Address Proof

Latest Telephone Bill | Electricity Bill | Bank Statement | Gas/Water Bill of Shareholders and Directors

Photograph

Latest Passport size Color photograph of Shareholders and Directors.

Registered office Proof

Latest Electricity Bill | Telephone Bill/Water/Gas Bill of the registered office address

NOC from owner

No Objection Certificate to be obtained from the owner(s) of registered office

Rent Agreement

If Property is taken on Rent, then rent agreement required. Agreement must be notarized.

For NRI

All the documents must be apostilled(if applicable) and notarized.

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Frequently asked questions

A minimum of two Persons is required to start a Partnership firm. A maximum number of 20 Partners are allowed in a Partnership firm.
The Partner must be an Indian citizen and a Resident of India. Non-Resident Indians and Persons of Indian Origin can only invest in a Proprietorship with prior approval of the Government of India.
PAN Card for the Partners along with identity and address proof is required. It is recommended to draft a Partnership deed and have it signed by all the Partners in the firm.
There is no limit on the minimum capital for starting a Partnership firm. Therefore, a Partnership firm can be started with any amount of minimum capital.
An IndiaFilings Associate will understand your business requirements and help you start a Partnership firm by drafting the Partnership deed. Based on the requirements, IndiaFilings can also help register the Partnership deed with the relevant Authorities to make the Partnership Firm a Registered Partnership firm.
Partnership firms are registered by the Registrar of Firms, under the Indian Partnership Act, 1932.