What is the meaning of Partnership firm?

When two or more people start a business or carry on a trade together to turn a profit, the result can often be a strong union that blends complementary skills, financial resources, customers and connections to help the venture succeed. This is the essence of Partnership. Partnership firms in India are governed by the Indian Partnership Act, 1932. Partnership firms are either registered or unregistered. It is not compulsory to register your partnership firm, although it is advisable to do so. It can be registered either at the time of its formation or even subsequently.

A Partnership is easy to form as no cumbersome legal formalities are involved. Its registration is also not essential. However, if the firm is not registered, it will be deprived of certain legal benefits. The Registrar of Firms is responsible for registering partnership firms.

Since the name of a Partnership firm is not registered, a Partnership firm can choose to have any name - as long as it does not infringe on a registered trademark. However, since the name is not registered, any other person can also use the same business name unless trademark registration is obtained.

A Partnership firm is not required to file its annual accounts with the Registrar each year unlike a Limited Liability Partnership or Company. Limited Liability Partnership's and Company's are required to file their annual accounts with Registrar of Companies each year.

A Partnership firm is not required to file audited financial statements with the Ministry of Corporate Affairs each year. Therefore, audit of financial statements is not required. However, tax audit may be required for a Partnership firm if the turnover exceeds prescribed limits.

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.

Partnership firms are registered by the Registrar of Firms, under the Indian Partnership Act, 1932.

Only a registered Partnership firm can 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. Also, only a Registered Partnership firm can claim a set off (i.e. mutual adjustment of debts owned by the disputant parties to one another) or other proceedings in a dispute with a third party. Hence, it is advisable for Partnership firms to get itself registered sooner or later.

To open a bank account for a Partnership firm, a registered Partnership deed along with identity and address proof of the Partners need to be provided.

No, a Partnership firm has no separate legal existence of its own i.e., the Partnership firm and the partners are one and the same in the eyes of law. Liability of the Partners is also unlimited, and the partners are said to be jointly and severally liable for the liabilities of the firm. This means that if the assets and property of the firm is insufficient to meet the debts of the firm, the creditors can recover their loans from the personal property of the individual partners.

If the Partnership firms are business entity that are owned, managed and controlled by one person. So Partners cannot be inducted into a Partnership firm.

There are restrictions on the transfer of ownership interest in a Partnership firm. A Partner cannot transfer his/her interest in the firm to any person (except to the existing partners) without the unanimous consent of all other partners.

Indian Nationals and Indian Residents are allowed to invest in a Partnership firm without any approval. Usually those who invest in the Partnership firm become a Partner of the firm and in the absence of any agreement to the contrary, all partners will have a right to participate in the activities of the business.

Partnership firm will have to file their annual tax return with the Income Tax Department. Other tax filings like service tax filing or VAT/CST filing may be necessary from time to time, based on the business activity performed. However, annual report or accounts need not be filed with the Ministry or Corporate Affairs, which is required for Limited Liability Partnerships and Companies.

It is not necessary for Partnerships to prepare audited financial statements each year. However, a tax audit may be necessary based on turnover and other criterion.

Yes, there are procedures for converting a Partnership business into a Company or a LLP at a later date. However, the procedures to convert a Partnership firm into a Company or LLP are cumbersome, expensive and time-consuming. Therefore, it is wise for many entrepreneurs to consider and start a LLP or Company instead of a Partnership firm.

A Partnership firm is not subject to excessive legal restrictions; therefore it enjoys freedom in administration. It is not required to file its annual accounts with the Registrar each year unlike a Limited Liability Partnership or Company. It can be easily dissolved. Any partner can give 14 days' notice to other partners and dissolve the firm with the consent of other partners. There is no requirement for audit of the accounts of a partnership firm annually as a Partnership firm is not required to file audited financial statements with the Ministry of Corporate Affairs each year. However, tax audit may be required for a Partnership firm if the turnover exceeds prescribed limits.

A firm is strictly not a person; It is an association of persons and the agreement by which a firm purports to enter into a partnership with an individual or another firm merely makes the partners of that firm individual partners of the larger partnership. A firm as such cannot enter into an agreement as a partner with another firm or individuals. Therefore, when one partnership enters into a partnership agreement with another partnership firm, the partnership is in fact between all the partners of both the firms. The Supreme Court has observed that a partnership agreement creates and defines the relation of partnership and, therefore, identifies the firm. if that conclusion is correct, it is only a further step to hold that each partnership agreement may constitute a distinct and separate partnership and, therefore, a distinct and separate firm.

That is not to say that a firm is a corporate entity or enjoys a juristic personality in that sense. The firm name is only a collective name for the individual partners and each partnership is a distinct relationship. The partners may be different and yet the nature of the business may be the same, the business may be different and yet the partnership may be the same. And agreement between partners to carry on a business and to share its profits may be followed by a separate agreement between the same partners to carry on another business and share the profits therein. The intention may be to constitute two separate partnerships and two distinct firms or to extend merely the partnership originally constituted to carry on one business or to carrying on another business. It will depend on the intention of the partners. The intention of the partners will have to be decided with reference to the terms of the agreement and all the surrounding circum- stances including evidence as to interlacing or interlocking of management, finance or other incidentals of the respective businesses.

In other words, the same partners can form two different partnerships. The Supreme Court has held that the word ‘person’ in section 4 of the Partnership Act contemplates only natural or artificial or legal person and a firm is not a person and as such not entitled to enter into a partnership with another firm or H. U. F. or individual. In this view of the matter there can arise no question of registration of a partnership purporting to be between three parties viz. a firm, a H.U.F. and an individual as a firm.

A partnership is constituted by an agreement between the partners. The agreement may be in writing or oral. But from the practical point of view and particularly in view of the provisions of other Acts such as the Income Tax Act as well as Partnership Act an oral partnership is not practicable, and therefore, a partnership agreement is necessarily required to be in writing. Therefore, the mere fact that two persons as joint owners either as heirs or legatees are carrying on a business it does not necessarily mean that they are partners and if they want to carry on the business in partnership, then a Partnership agreement in writing becomes necessary. For example, if a person dies leaving a running business and his heirs continue to carry on such business, it will not be a business carried on in partnership and if they want to do so they will have to enter into a regular agreement of partnership. Being an agreement and an agreement enforceable at law, such an agreement must fulfill the basic requirements of a valid contract, as required by the Contract Act. Therefore, a minor or a mentally handicapped person cannot enter into a partnership agreement though by virtue of the provisions of the Partnership Act a minor can be admitted only to the benefits of the partnership. But that only means that a minor can have a share in the profits of the business, but he cannot become a partner, and cannot execute any agreement of partnership.

A partnership agreement can be oral or in writing. It is not the general practice to enter into a preliminary agreement to enter into a regular partnership agreement. But if such a preliminary agreement is entered into and the partners start business in anticipation of executing a formal deed of partnership, the partnership shall be deemed to have commenced from the commencement of the business, unless the preliminary agreement is conditional upon the happening or not happening of some event in which case the partnership cannot be said to have come into existence unless the event has happened or not happened. Another test of partnership as mentioned above is that of sharing profits, and which is an essential requirement of a partnership. Profits may be shared in such proportions as the parties may agree, but sharing of profits is most essential. As against that, sharing of losses only suffered in business is not a test to constitute a partnership.