All about Partnership Firms from Incorporation to Taxation

Hello Everyone! Today's blog is about Partnership form of Business. In the last blog we talked about Sole Proprietorship and whether it is a suitable form for your Business. Similarly in this blog we will discuss about Partnership form of Business in detail so that you can conclude whether it is a perfect match for your Business. So without further ado, let's get started.

What is Partnership?

Partnership is the relation between persons who have agreed to share the profits and loses of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are individually called Partner. The name under which their business is carried on is called the "firm-name". 

For eg, Mr A and Mr B started a business and named the business as AB & Co. So in the case Mr A and Mr B will be the partners in the Partnership firm AB & Co.

In India, partnership is governed by the act Partnership Act 1932. According to section 5 of the act, the relation of partnership arises from contract and not from status. There should be some contract or agreement between the partners.

Advantage of Partnership :

Easy Formation

Partnership Firm can be started by drafting partnership deed and entering into partnership agreement. The registrations of partnership is not compulsory.

Capital

Unlike Sole Proprietorship where only one person was responsible for capital contribution, here since two or more partners are associated with the business so each partner contribute to the capital making a larger pool of funds.

Sharing Risk

As there are two or more owner so the risk and losses are shared amongst themselves. No individual partner has to suffer 100% of the losses.

Minimum compliance

The compliance in partnership is very less as compared to the company. In India, all companies are required to get their financial statement audited but this is not the case for partnership firm.

Cost Saving

The partnership incorporation fee is lesser than that of LLP and Company. In LLP and company the partners should have DSC(Degital Signature) or DPIN (Designated Partner Identification number) or DIN (Director Identification Number) but there is no such requirement in case of partnership firm.

Large base of talent

As two or more people come together in partnership so each individual can use their specialized skill and expertise in the business.

Disadvantages of Partnership :

Unlimited liability

The partners have unlimited liability. They have to bear the entire losses, debt and risk of the business.

No perpetual existence

Partnership firm doesn't enjoy perpetual succession like company. If there is nothing specific in the contract then the partnership will dissolve in case of death or retirement of partners.

Limited Numbers of Partners 

The maximum number of partner can be only 20 and in the case of bank it is limited to 10. There is no such limit of members for public limited company.

Potential of conflict 

As there will be more than 1 owner so there might arise a situation where the partners do not agree with each other. Therefore, some partners may have to compromise in decision making.

Taxation of Partnership :

The partnership firm has to file their return of income and therefore are equired to obtain PAN. The tax rate for partnership firm is 30%. They don't enjoy the benefit of slab rate.

Remuneration and Interest paid to partners are allowed as deduction against the income of partnership firm.

However, the remuneration and Interest deduction are subject to the limit under section 40(b) of Income Tax act. Moreover, losses can be carried forward by the firm.

Partnership Firm Registration in India :

According to section 58 of the Partnership Act 1932, the registration of a firm can be done by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee and a true copy of the deed of partnership stating :

(a) the firm-name and the nature of business of the firm;

(b) the place or principal place of business of the firm,

(c) the names of any other places where the firm carries on business,

(d) the date when each partner joined the firm,

(e) the names in full and permanent addresses of the partners, and

(f) the duration of the firm.

The statement shall be signed by all the partners, or by their agents specially authorised.

When the Registrar is satisfied that the provisions of section 58 have been duly complied with, he shall record an entry of the statement in a register called the Register of Firms, and shall file the statement and the certificate of registration is issued.

Conclusion

To sum up, partnership form of business is low cost and has less compliance. It could be best suited for a small scale business as there are more than one owner who contribute to capital and share the losses. But it has unlimited liability so you should be adequately secured to put your personal asset at risk. If you want limited liabilty then you may opt for LLP (Limited Liability Partnership). We will discuss in depth about LLP in our upcoming blog. Till then be safe and do check our other blogs.

CA Megha Sudrania 

TAX DESTINATION