A Partnership Firm is a popular form of business constitution for businesses that are owned, managed and controlled by an Association of People for profit. Partnership firms are relatively easy to start are is prevalent amongst small and medium sized businesses in the unorganized sectors. With the introduction of Limited Liability Partnerships in India, Partnership Firms are fast losing their prevalence due to the added advantages offered by a Limited Liability Partnership.
There are two types of Partnership firms, registered and un-registered Partnership firm. It is not compulsory to register a Partnership firm; however, it is advisable to register a partnership firm due to the added advantages. Partnership firms are created by drafting a Partnership deed amongst the Partners and TaxFreedom can help start a registered or un-registered Partnership firm in India.
How many persons are required to start a partnership?
A minimum of two persons i.e. partners is required to start a partnership firm. A maximum number of 20 partners are allowed in a partnership firm.
What is the criteria to become a partner in India?
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.
What documents are required to be a partner?
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.
Is partnership required to be registered?
Not necessarily. However, unless a partnership firm is registered with the registrar of firms and societies, the rights of the partners interest or against strangers cannot be enforced in a court of law. Only a registered partnership firm can file a suit in any court. Hence, it is advisable for partnership firms to get it registered sooner or later.
What is the liability of partners?
The firm and all the partners are liable for the wrongful act or fraud that causes loss or injury to any third parties. Any property can be treated as the property of the firm by simply showing it as such in the book of accounts. This would constitute partnership property and all partners are joint owners of the partnership property as increased or decreased by profits in the course of business. Property belonging to an individual partner does not become the firmâ€™s property simply by being used for the purpose of the partnership. Just like a sole proprietorship, the liability of partners in a partnership firm is also unlimited. This means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can be utilized to meet the business liabilities.
Is partnership a separate legal entity?
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. A partnership is not considered separate from its partners for tax purposes.
What tax return compliances does a partnership firm has to follow?
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 criteria.
Can a basic partnership be converted into Company or LLP?
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.
What is the minimum capital required to start a partnership?
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.