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.
The Indian Partnership Act of 1932 deals with aspects governing partnerships. A critical aspect of partnership is that each partner is a principal as well as agent for all the other partners of the firm and therefore an act of one partner is an act of all partners. In other words, it means, each partner is liable for the actions of other partners of the firm (unlimited liability).
In India, registration of a Partnership Firms is not mandatory, however, it is recommended that one registers a Partnership Firm considering the benefits of a registered firm and restrictions on approaching a court-of-law for enforcement of rights of a Partners.
- A Partnership Firm is registered by the Registrar of Firm of the Indian State where the office of the firm is located. The procedure and requirements for registration of Partnership Firm is fairly straight forward.
- Application for Registration of Partnership Firm has to be made (Form 1 of the State Registrar of Firm)
- Partnership Deed
- PAN card of Partners
- Address Proof of Partners
- Address Proof of the Firm or Rental Agreement of the place.
- NOC from the landowner
1. Should a Partnership Firm be registered?
There is no provision under the partnership Act, 1932 which mandates the registration of partnership. However, the Act itself provides for the procedure of registration of the firm. Thus the registration is optional but highly recommended, as an unregistered firm shall not be able to recover any money in excess of INR 100/-. Apart from the above legal impediment, from the practical point of view also the firm should get registered in order to bring certainty in the relationship of partners and the firm per se.
2. Is a written partnership deed necessary to form a Partnership Firm?
No, it is not necessary. As the contract act does not make it necessary to have the agreement in writing. However, it is always prudent to make a partnership deed to produce to the bank, income tax authorities and to clients with whom the partnership firm deals with. Apart from serving as a reference document, a written partnership deed also helps in reducing conflict and confusion in due course of time.
3. Is it necessary to draft a Partnership Deed?
It is not necessary to have a written partnership deed, but it is recommended to avoid any conflict between the partners in the future.
4. What is the personal liability of the partner for the business obligations of the Partnership Firm?
Partners are personally liable for the business obligations of the partnership. This means that if the firm can’t afford to pay creditors or the business fails, the partners are individually responsible to pay for the debts and creditors can go after personal assets such as bank accounts, cars, and even homes of the partners. For example, if the partnership dissolves and there are still outstanding debts to suppliers or lenders, those creditors can sue the partners personally to pay for the debts. Debts of the partnership will expose personal assets to liability unless it is a limited partner, in which case liability is limited to the money that is invested.
5. What is a dissolution of a partnership firm?
Section 39 of the Indian Partnership Act, provides that “the dissolution of the partnership between all the partners of a firm is called the dissolution of a firm.” It implies the complete break-down of the relation of partnership between all the partners.
6. What is the rate of income tax on partnership firm?
A partnership firm needs to pay income tax at 30% of total income. If the total income passes 1 crore then a partnership firm has to pay income tax surcharge on the amount of income tax at the rate of 12%. In addition to the income tax and surcharge, a partnership firm must pay education cess and secondary higher education cess. Education Cess is applicable on the amount of income tax and the applicable surcharge at the rate of 2%. Secondary and higher education cess is applicable on the amount of income tax and the applicable surcharge at the rate of 1%.
7. Can a minor admitted to the benefits of partnership, become a partner on attaining a majority?
A minor admitted to the benefits of partnership has the option to become a partner within six months of attaining majority. He has to give a public notice stating his acceptance or rejection of partnership. In the absence of a notice, it is considered that he has become a partner of the firm.
8. What are its implications of a partner being served a notice?
A notice served on any one of the partners who manage the affairs of the firm is treated as a notice on the entire firm under the law. However, in case of fraud being committed on the firm by or with the consent of the managing partner it shall not be treated as a notice to the firm but as a notice to only that partner who has committed fraud on the firm.
9. Can a partner transfer his right in the business of the firm to an outsider?
Yes, a partner can transfer his interest in the business to an outsider, but only with the consent of all other partners.
10. Can a new partner be admitted into the Partnership Firm?
A partner can nominate a successor to take his place in the event of death or retirement of the partner. The mode of introducing a new partner or successor is based on provisions in the partnership deed. A new partnership deed is required once the new partner is admitted into the firm.
11. Can a Hindu Undivided Family become a partner of a firm?
A HUF is not a legal person and so cannot enter into partnership with either an individual or another HUF.