In India, partnership firm is a default choice when two or more people decided to start a business. In simpler terms, a partnership is an agreement between two or more persons to operate a business. These people who joined hands together by signing an agreement to form a partnership firm are known as partners.
A partnership firm is similar to a proprietorship form of business except instead of one owner or proprietor, there is more than one owner/partner.
Partners pull money towards a common purpose by forming a legal relationship. All the terms and conditions such as capital introduced by each partners, salary of partners, business objective, interest and profit sharing ratio and how and when partnership firm will be dissolved is mentioned in the agreement known as partnership deed signed by each partners.
You are not required to register your partnership firm. To get a legal proof of your firm’s existence, you can apply for registration with the Registrar of Firms.
How to create a partnership firm in India – step by step procedure
Before starting the process of creating a partnership firm, we suggest you to first decide on following important things;
- Profit and loss sharing ratio of each partners
- Business objective
- Registered and branch offices from where it will run its business.
- Total capital contribution and capital to be introduced by each partners
- Remuneration of each working partners
- Interest on capital to be paid, if any
- Admission, retirement and resignation of partners
After deciding on above points, creating a partnership firm is easy. You can even get started within a day. You need to follow below steps to create it;
Choose partnership firm name
You can choose any name based on your requirements. However, we suggest you to check trademark database to know if that name is already registered. In absence of trademark registration, you are free to use the name for your commercial purpose. To avoid future dispute, we suggest you to take trademark registration for your partnership firm name.
Avoid using all prohibited words and expression in your name.
Create a partnership deed
Partnership deed is the document which mention all the terms and conditions of forming a partnership firm. You need to specifically include name and address of the business and partners, business objective, when to commence business, duration, capital contribution, profit sharing ratio, remuneration of each partner and other important points. We suggest you to take help of a finance professional to draft it for you.
After drafting all the terms and conditions, take print out on a stamp paper in accordance to the Indian stamp act. The first page can be taken on the stamp paper and all others in A4 size paper. Each page including the last page has to be signed by each partners and two witness. Photo of all the partners are to be pasted on the front page by identifying each partner.
After preparing the deed, you need to get it notarized. Here is a list of questions that your deed or agreement must answer;
- Who is responsible for the day-to-day operation of the business?
- Who is liable for the debt of the business?
- How Profit/loss is distributed amount the owners/partners?
- How much salary will be paid to owners and how to derive it?
- What will be the interest on capital and how it will be paid?
- How new persons will be added or join the business?
- What business it will carry after signing the deed?
- What will be the firm’s registered office?
Apply for PAN
After preparing partnership deed, you need to apply for its permanent account number or PAN. You can use form 49B and submit it to any TIN FC along with a certified true copy of the deed. You can also apply PAN online by using net banking to pay the fee.
If you want your firm to be registered, then you can apply Registrar of Firm along with a certified true copy of the partnership deed, address proof and duly filled specimen of affidavit. If the registrar is satisfied, then your firm name will entered into the registrar of firms and you will be issued a certificate of registration.
After getting PAN and Certificate of registration, you can open a current account in the name of partnership firm and start operating your business.
For registration and drafting the deed, we suggest you to take help of a chartered accountant or advocate as certain terms and conditions in the deed may put you in trouble to claim tax deductions and in other legal matters.
In India, a partnership firm is taxed as a separate entity even though its not legally a separate entity. Each partner of the firm, report his or her share of profit, interest on capital and remuneration on his or her personal income tax return.
In certain professions including accounting, audit, law, architecture and consultancy services, businesses are commonly organized as partnerships.
In comparison to a company, proprietorship and partnership businesses are very easy and inexpensive to establish.Company formation and post incorporation compliance is very complicated and costly for a small business.However, if you wants your business to grow and attract investors to join in, then it’s worth investing money in a private or public limited company.
To summarize, here are the main disadvantages of a partnership firm;
- unlimited business liability of partners,
- limited life of the business,
- difficult to raise large amount of capital, and
- difficult to transfer business ownership