A partnership firm is a body of more than one person conducting business under one entity where people join hands to carry out a business for profit.The partners become joint business owners and carry out operations governed by the partnership deed. The regulations are least and it makes it a desirable option for businesses having joint owners. However, in a partnership firm the partners are jointly and individually liable for debts of the firm. This form of structure is ideal if there are no/less requirement of external funds and low risk of bad-debts for example consultancy firms.
There are two types of partnership firms-
- Registered partnership firm
- Unregistered partnership firm
Registration of a Partnership Firm:
Partnership firms are governed by the Indian Partnership Act, 1932. Under the act, registration is not mandatory but it is advisable due to the following reasons:
- Partner(s) can’t file a case in any court against the firm/ other partners unless firm is registered.
- The unregistered firm or its partners can’t file a case against third party on breach of a contract but the third party can file a case
- In case of a dispute with a third party, the unregistered firm or any of its partners cannot claim a set off
A partnership firm can be registered whether at the time of its formation or even subsequently. The application for registration is to be made to the registrar of firms of the region in which the business is situated. It is advisable to get the firm registered as soon as it starts its business to avail the rights that can be enjoyed only by a registered firm.
Advantages of a Partnership Firm Includes:
- Easy to Start
- Larger Resources
- Flexibility in operation
- Better Management
- Sharing of Risk
Disadvantages of a Partnership Firm Includes:
- Unlimited Liability
- Lack of Harmony
- Limited Capital
- No legal status
Process to create partnership firm:
A partnership firm is created by means of a written agreement between partners. However, it is important to note that a valid partnership can even be created orally, or it can be an implied partnership (due to acts of persons undertaken jointly).
The following are the steps in starting a business under Partnership in India
- Deciding the terms of Partnership
- Documenting the partnership Deed
- Registration of Partnership deed with ROF
- Apply for PAN and TAN
- Opening a Bank Account
- Apply for business licenses, GST, Registration, etc.
Check List of Partnership Firm:
- Determine partnership name
- Record Partners names, ID#’s, record of ownership
- Set up partnership agreements
- Set up buy/sell – change in partnership interest agreements
- Do assumed (fictitious) business name registration
- Apply for required operating permits, licenses, bonds, etc.
- Set up acceptable bookkeeping system
- Establish appropriate travel and entertainment procedures and record keeping reports
- Set up bank / checking accounts