Expansion of businesses and the limitations of a sole proprietorship has paved a way and necessitated the rise of partnership firms. But, before dwelling into the compliances of a partnership firm, we need to first understand it’s meaning.
What is a partnership firm?
A Partnership Firm is where two or more individuals join hands to carry out a business for profit. It is formed as a result of an association of two or more persons to carry on a business in the capacity of co-owners. The individuals entering into such a partnership agreement are called partners and the firm that they run is known as a partnership firm. In India, Partnership firms are governed by the Indian Partnership Act 1932. Section 4 of the Indian Partnership Act of 1932, defines partnership as “the relation between person who has agreed to share profits of a business carried on by all or any of them acting for all.”
● The partnership gets dissolved if the number of persons comes down to one. Hence, the partnership is an association of at least two people. The maximum number of persons for a partnership firm is 60.
● A partnership firm is a result of an agreement and it must fulfil the essentials of a valid contract.
● The very purpose of the partnership is to carry on business to earn profits and sharing of its profits and losses between the partners is an essential feature of the partnership firm.
● The partners are deemed to the joint business owners and they decide the terms and conditions of the business operations.
● In a partnership firm, the partners are jointly as well as individually liable to the firm’s debts(in the proportion of their capitals, or as agreed between them).
The regulations governing a partnership firm are minimal, which makes it a desirable option for businesses having joint owners. Red Bull, GoPro Spotify, Uber, Levi’s and Pinterest are some of the examples of a Partnership Firm.
What are the steps involved in the Formation of a Partnership Firm?
● The first step is to decide on a suitable name for the firm. However, the name must not be too identical to an already existing firm in the same business. The firm’s name should not contain words like an empire, emperor, crown or any such word that shows the sanction or approval of the government.
● The next step is to form an agreement between the partners, which mentions the rights, duties, profit share and other obligations of each partner. The partnership deed can be either written oral. However, it is advisable to have a written partnership deed so as to avoid any future conflicts.
What are the contents of a partnership deed?
There is no particular format for the draft of a partnership deed but a general deed contains following clauses:
● Name and address of all the partners.
● Date of commencement of business.
● Duration of the firm’s existence.
● Capital to be contributed by each partner.
● Profit/loss sharing ratio.
● Salaries payable to partners.
● Duties and obligations of the partners involved.
● The process to be followed on account of the retirement or death of a partner or dissolution of the firm.
● Any other mutually decided clauses.
Process of Registration Partnership Firm
Registration of a partnership firm is not mandatory and is at the discretion of the partners. However, it is to be noted that to register a partnership firm in India, it must be duly notarized and stamped. It is advisable to have the partnership firm registered so as to enjoy certain rights which are not available to the unregistered partnership firms.
The Indian Partnership Act, 1932 governs the partnership firms in India. In order to register a partnership firm, an application form along with the fees must be submitted to the Registrar of Firms of the state in which the firm is situated. The application to be submitted should be duly signed by all the partners or their agents. Thereafter, Partnership deed is created on the stamp paper, which should be signed by all the partners with notarization.
Documents required for the registration process
Following is the list of documents needed to register a Partnership Firm in India:
● Application for registration of partnership (Form 1).
● Specimen of an affidavit.
● Certified original copy of Partnership Deed.
● Ownership documents of the business place if the property is owned.
● In case the property is on rent, rental agreement as a proof of principal place of business.
● Identity proof of all the partners involved which can be either of the documents out of PAN card/ Aadhar Card/ Driving License/ Voter ID/ Passport.
All these documents must be submitted to the registrar for verification of the said documents. If the registrar is satisfied with the documents, It will register the firm in Register of Firms and issue Certificate of registration.
Tax Compliance for a partnership Firm
● Once the registration process has been completed, it is necessary for the partnership firm to obtain Permanent Account Number (PAN) and Tax Deduction Account Number from the Income Tax Department.
● Irrespective of the revenue or loss, the Partnership firm needs to file an Income tax return (ITR). The rate of income tax on the whole of the total income will be 30% surcharge on income tax, for a partnership firm.
● It is necessary to obtain a tax audit for Partnership Firms which have an annual turnover of over Rs.100 lakhs.
● for businesses whose annual turnover exceeds Rs, 40 lakhs ( Rs 20 lakhs for North Eastern states), Goods and services tax(GST) registration is required. For certain businesses like Export-Import, E-commerce, and Market Place Aggregator, GST registration is mandatory.
● After the GST registration, the firms have to file monthly, quarterly as well as annual GST returns.
● For those partnership firms which have employees’ state insurance (ESI), it is mandatory for them to file an ESI return.
Documents Required for Annual Compliance of a Partnership Firm
● Invoices of sales and purchase during a financial year.
● Invoices of expenses made during a financial year.
● Bank statements of the bank accounts of the partners.
● Copy of tax deducted at source (TDS) copies filed.
● Copy of GST returns filed.
Partnership firms are easy to start with and they have minimal compliances as well. There are a lot of advantages of a general partnership firm but, nothing is devoid of disadvantages. Therefore, the main disadvantages are that they have limited access to capital and the feature of unlimited liability. It Is quiet evident that the advantages outweigh the disadvantages and partnership firm. Therefore, it can be said that the partnership firms are the most suitable for starting a business with a group of people as they are comparatively easy to set up and come with extra managerial support.