Formation of Partnership Firm

The Indian Partnership Act, 1932 (the Act”) was enacted in 1932 and came into force with effect from 01st October, 1932 except section 69 of the Act which was came into force w.e.f. 1st October, 1993. A “contract’ is essential for every Partnerships and the same is governed by the Indian Contract. So we can say that the provision of India Contract Act which is not repealed will be applicable on Partnership until and unless such provision is in contrary to any provision of Partnership Act, 1932.

• GOVERNING LAW:

The Partnership Act, 1932 (may be called Indian Partnership Act, 1932).

It came into force w.e.f. 01.10.1932 extends to the whole of India except the State of Jammu and Kashmir (J&K). Further also needs to follow the provisions related to the Indian Contract to some extent.

WHAT IS PARTNERSHIP:

As per Section 4 of The Partnership Act, 1932:

“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

As per case law (Deoha F.Guzder Bombay us C.I.T. Air, 1955 SC 74.) : Partnership is an association of persons carrying business & in law the firm name is compendious method of describing partners.

THE FOLLOWING ARE THE ESSENTIAL REQUIREMENTS /CHARACTERISTICS OF A PARTNERSHIP DEED:-

• Name and Address of the firm as well as all the partners
• Nature of business to be carried on
• Date of Commencement of business
• Duration of Partnership (whether for a fixed period/project)
• Capital contribution by each partner
• Profit sharing ratio among the partners

ADDITIONAL IMPORTANT CLAUSES – FOR DEED:-

• Interest on Partner’s Capital, Partners’ Loan, and Interest, if any, to be charged on drawings.
• Salaries, Commissions etc, if any, payable to partners
• Method of preparing accounts and arrangement for audit
• Division of task and responsibility i.e. the duties, powers and obligations of all the partners.
• Rules to be followed in case of retirement, death and admission of a partner

Kindly note that:

The Partnership Deed created by the partners should be on a stamp paper in accordance with the Indian Stamp Act and each partner should have a copy of the partnership deed.

A Copy of the Partnership Deed should also be filed with the Registrar of Firms in case the firm is being registered.

SOME KEY FACTS ABOUT PARTNERSHIP FIRMS:

Section 4 of The Partnership Act, 1932 does not insist upon sharing of losses. Thus a provision for sharing of loss is not necessary.

• A Partnership firm is not required to file its annual accounts with the Registrar of firm each year unlike a LLP or Company.
• The Profits of a Partnership firm are taxed at 30% + Cess.
• Any Indian Citizen residing in India can be a Partner in a Partnership Firm including minors (to the Benefits of Partnership).
• A Partnership can exist only for business. Section 2(b) of The Partnership Act, 1932 states that business includes every trade, profession and occupation.
• The persons concerned must agree to share the profits of the business. Section 4 of The Partnership Act, 1932 does not insist upon sharing of losses. Thus a provision forsharing of loss is not necessary.
• The share in a Partnership can be transferred to another person after obtaining the permission of all the Partners in a Partnership. The transferability of a Partnership is cumbersome. Partnership can be converted into a LLP or a Private Limited Company.
• Partnership firm and the Partners are not considered separate legal entities, neither does the Partnership have perpetual existence.
• Under the Start-up India Scheme, Partnership firms registered with Registrar of Firms (ROF’s) with a valid registration certificate can apply for DPIIT Recognition and get recognized as Start-ups by DPIIT, in order to access a host of tax benefits, easier compliance, IPR fast-tracking.

Number of Parners:

• Minimum: 2
• Maximum: 50*

*As per Section 464 of the Companies Act, 2013, no association or partnerships consisting of more than 100 number of persons as may be prescribed shall be formed for the purpose of carrying on any business. Further Rule 10 of Companies (incorporation) Rules 2014 specifies the limit as 50. Thus, maximum number of members in a partnership firm are 50.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Every effort has been made to keep the information cited in this article error-free. Suggestions and feedback to improve the task are welcome. The article and opinions therein are based on our understanding of the law and provisions prevailing as on date. The contents of this write – up are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. The opinion may vary according to one’s interpretation of the law. It should not be relied upon as the sole basis for any decision which may affect you or your business.