Individuals entering into an agreement to initiate and run a business are partners, and the firm they set up is known as a partnership firm, and the name of such a company will be known as the firm name.
A partnership is an agreement betwixt two or more individuals to work together on specific pre-decided T&Cs (terms and conditions). It is not a legal firm. Whereas a company, whether private or public limited, is an artificial person, a partnership is solely a name provided to a group of people working together, even if it is a registered partnership.
That’s why whenever the terms such as firm’s property or lawsuit against the firm are used, it generally means partners’ property or lawsuit against the partners. Now, let’s look into the partnership firm requirements including the partnership deed registration online and its importance.
A partnership firm is regulated and governed by the Indian partnership act of 1932. According to section four, a partnership is a relation betwixt individuals who gave the consent to share the profits of the business carried on by all or any one of them acting for all.
The statement as mentioned earlier brings us to the five components that make up the partnership as given below;
Partnership firm’s members – the maximum number of partners that such a firm is allowed to have, is twenty. It is crucial to know that the Indian partnership act does not explain the maximum limit, but a partnership can have a maximum of twenty partners as per the companies act. Beyond that number, the business would not be considered legal.
It is essential to know that a partnership firm is not allowed to enter into a partnership with another partnership firm or individuals. Likewise, keep in mind that if a partnership firm under the firm name does enter into a contract with another firm or individual, then the firm’s members become partners under the law.
Business activity under the partnership – The parties involved should have agreed to conduct business activity. It includes the expanded definition, occupation, entailing every trade, profession. Thus, if it is charity work, then it will not be taken as a partnership firm.
Contract of the partnership – a partnership is the result of a contract and does not occur because of a particular operation, status, law or any sort of inheritance. For instance, a father (who is the associate in the firm) dies; in such a scenario, his daughter or son can take the claim to share in the partnership property but can only become a partner once he/she enters into the contract with the other existing partners. A contract is the fundamental part of the partnership firm with the rights of partners who can make change in partnership deed as well.
If a group of persons chooses to share the income from a particular property or divide certain goods that have been bought, the people involved cannot be referred to as partners as there is no business involved.
Profit-sharing – A partnership firm’s objective has to be to share profits among involved partners. As stated earlier, any philanthropic work that involves no profits would not be taken as a partnership. Also, the profit-sharing, nonetheless, can decide in whichever ratio the involved partners prefer. Partners don’t need to share losses too. Similarly, losses can be borne by one person too.
Nonetheless, one should know that his/her share in losses might be negligible, but his/her liability to an outsider shall remain infinite. The profit and loss sharing ratio has to be mentioned in the contract, and where it is absent, it would be shared equally between all the partners.
Mutual agreement – The partnership can be conducted by all or any one partner who has been appointed by all partners. There must be a mutual agreement in this regard. Also, primarily it means that every partner is an agent and a principal both, which further means he/she can be bound by acts of others or their own actions.
Fewer compliance burden – the annual compliance burden of a registered partnership firm is less compared to others. Also, there is no need to appoint an auditor. They do not have to file service tax, sales tax, and taxes relying on the turnover.
High credibility – registered partnership firm enjoys high credibility compared to unregistered one. Also, registered ones are preferred by investors and authorities over unregistered ones.
Ability to set off claims – registration offers partners the ability to set off claims if any third-party suit files against the firm. According to the partnership act, 1932, an unregistered partnership firm cannot claim a set-off against the third party.
Dispute resolution becomes easy – the registered firm can bring other parties to court in legal disputes in any matter. The partners of an unregistered partnership firm cannot impose any rights stated in the partnership act.