Partnership and Proprietorship are the 2 most popular forms of business organisations in India. The reason why these 2 forms of organisations are so popular is because they are relatively easy to set-up and the no. of statutory compliance required to be done by these forms of organisations is relatively less than the statutory compliance applicable to LLP’s and Companies.
- Recommended Read: Partnership vs Company: – Which one is suitable for your business?
In one of our previous articles, we explained on how easy it is to start a Proprietorship Firm (Recommended Read: How to start a Proprietorship Firm) and in this article, we would be focusing on How to start a Partnership Firm in India. If you are still unsure on what a Partnership Firm is and its 5 essential elements, this article would be a good read.
- Recommended Read: What is a Partnership Firm and its 5 essential elements
Choosing a Partnership Firm Name
The partners are free to choose any name as they desire for their partnership firm subject to the following rules:-
- The names must not be too identical or similar to the name of another existing firm doing similar business so as to lead to confusion. The reason for this rule being that the reputation or goodwill of a firm may be injured, if a new firm could adopt an allied name.
- The name must not contain words like Crown, Emperor, Empress, Empire or words expressing or implying the sanction, approval or patronage of Govt except when the State Govt signifies its consent in writing to the use of such words as part of the firm name [Section 58(3)]
How to create a Partnership Deed?
The document in which the respective rights and obligations of the members of a partnership is written is called the Partnership Deed.
A partnership deed agreement may be written or oral. However, practically oral agreement does not have any value for tax purposes and therefore the partnership agreement should be written. The following are the essential characteristics of a partnership deed:-
- Name and Address of the firm as well as all the partners
- Nature of business to be carried on
- Date of Commencement of business
- Duration of Partnership (whether for a fixed period/project)
- Capital contribution by each partner
- Profit sharing ratio among the partners
The above are the minimum essentials which are required in all partnership deeds. The partners may also mention any additional clauses. Some of the examples of additional clauses which may be mentioned in the partnership deed are mentioned below:-
- Interest on Partner’s Capital, Partners’ Loan, and Interest, if any, to be charged on drawings.
- Salaries, Commissions etc, if any, payable to partners
- Method of preparing accounts and arrangement for audit
- Division of task and responsibility i.e. the duties, powers and obligations of all the partners.
- Rules to be followed in case of retirement, death and admission of a partner.
These are some examples of additional points which the partners may mention in the partnership deed. They may also mention any other point than those mentioned above. A few sample copies of the Partnership Deed can be downloaded from the following links:-
The Partnership Deed created by the partners should be on a stamp paper in accordance with the Indian Stamp Act and each partner should have a copy of the partnership deed. A Copy of the Partnership Deed should also be filed with the Registrar of Firms in case the firm is being registered.
How to register a Partnership Firm in India
Partnerships in India are governed by the Indian Partnership Act, 1932. As per the Partnership Act, Registration of Partnership Firms is optional and is entirely at the discretion of the partners. The Partners may or may not register their Partnership Agreement.
However, in case the partnership deed is not registered, they may not be able to enjoy the benefits which a registered partnership firm enjoys.
- Recommended Read: Benefits of Registration of a Partnership Firm
Registration of Partnership Firm may be done before starting the business or anytime during the continuance of partnership. However, where the firm intends to file a case in the court to enforce rights arising from the contract, the registration should be done before filing the case.
The procedure for Registration of Partnership Firms in India is fairly simple. An application and the prescribed fees are required to be submitted to the Registrar of Firms of the State in which the firm is situated. The following documents are also required to be submitted along with the application:-
- Application for Registration of Partnership in Form No. 1
- Duly filled specimen of Affidavit
- Certified True Copy of the Partnership Deed
- Ownership proof of the principal place of business or rental/lease agreement thereof.
The application or statement must be signed by all the partners, or by their agents especially authorised in this behalf. When the registrar is satisfied with the points stated in the partnership deed, he shall record an entry of the statement in a register called the Register of Firms and issue a Certificate of Registration (Sec 59).
The Register of Firms maintained at the office of the Registrar contains complete and up-to-date information about each registered firm. This Register of Firms is open to inspection by any person on payment of the prescribed fees (Sec 66).
Any person interested in viewing the details of any firm can request the Registrar of Firms for the same and on payment of the prescribed fees, a copy of all details of with Firm registered with the Registrar would be given to the applicant
It should however be noted that registration with the Registrar of Firms is different from Registration with the Income Tax Deptt. It is mandatory for all firms to apply for Registration with the Income Tax Department and have a PAN Card.
After obtaining a PAN Card, the Partnership Firm would be required to open a Current Account in the name of the Partnership Firm and operate all its operations through this Bank Account.
- Recommended Read: How to open a Current Account in a Bank