How to Incorporate a Partnership Firm in India

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Want to start a Firm of your Own?

 

Tired of running a business all alone? As the famous song goes, “No man can live as an Island…” Maybe you should consider picking a faithful partner and members for the business.

But, did you faint by seeing the registration formalities and hard-core legal technicalities used for a company? Want to make your life and business simple minus all the legal hurdles?

A Partnership Firm is what you are looking for.

A Partnership firm is defined in a simple act called the Partnership Act, 1932. And relax, because it doesn’t contain 400+ sections like a Companies Act. It contains only 72 sections. It defines partnership firm as 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 [Section 4]. The legal basement of a partnership lies in the agreement or contract [Section 5] that is executed between the partners of the firm. It is essentially the terms of the contract that controls the functioning of the partnership firm. This implies that you as a partner can function the business entirely on your own terms [with the other partner’s consensus, of course] and there is no legislation to restrain you.Only other requirement while constructing such a contract is that it must ensure a sharing of profits between the partners.

Now comes the question of registration. Incorporation of a partnership firm is not necessary. You may conduct the firm on the basis of contracts but that will deprive you of some necessary things required for the business.

  • Power to sue by a partner against the firm or against any other partner
  • Power of firm to sue against 3rd parties
  • Power to claim set off

In my opinion, you will be missing out on crucial benefits if you are not registering your firm. Either wise, the procedure laid down is not cumbersome and hence, why not go for a registration and be over with it?

Pre-Registration Formalities

Step 1: Draft a Partnership Deed

This agreement spells out all the rights and duties of the partner. It must essentially contain the following features:

  • Name and Address of the Firm
  • Nature of Business
  • Date of Commencement of Business
  • Duration of Partnership
  • Capital Contribution by each partner
  • Profit sharing Ratio

Many other additional terms may be included like salaries, accounting methods etc: That is entirely up to you.

You need to draft a partnership agreement in Non-Judicial Stamp Paper of Rs 100/- and all the partners must sign it. Oral agreement will qualify as a partnership deed but it will not help tax purposes. Hence, get a written one.

Time and Cost: Well, depends on your lawyer’s charges…

Registration

Step 2: Filing the Application

The application form is given in Form A of the Schedule 2 of the Partnership Act is to be submitted to the Registrar of Firms of your respective states to get the firm registered. The completed form, with the certified copy of the partnership deed must be submitted to the Registrar.

Also, one must attach the following documents to the application.

  • ID and Address Proof of Partners like Pan Card/Passport/Voter ID/Aadhar Card/Driving License Copy of the Partners.
  • One Business Place Address proof :-
  1. If Property on Rented: – Need Rent Agreement and NOC from Landlord.
  2. If Property is own: – Need Electricity Bills or any other Address Proof.

Note:  Business place and home place can be same of the Partners.

Cost: Filing Fees Rs. 1500. (It may vary state-wise, here the fees of Maharashtra is provided)

Method of Payment: If the application is being submitted through online, one has to access the website of the registrar of firms. The method of any payment again differs from state to state.

Time for waiting for the Certificate: requires a minimum of 6 days.

Step 3: Finally, the Certificate!!!

When the registrar is satisfied with the points stated in the partnership deed, he or she shall record an entry of the statement in a register called the Register of Firms and issue a Certificate of Registration. The Register of Firms maintained at the office of the Registrar contains complete and up-to-date information about each registered firm.

 

After Registration

Step 4: Apply for a PAN Card in the name of the Firm

For tax purposes, one must apply for a PAN CARD in the name of the partnership firm. For this, one has to submit the copy of the partnership deed and fill the usual FORM 49A to get the PAN Card. The things to be kept in mind are that there must be a managing partner to sign the application on behalf of the firm. The rest of the procedures are the same as applying for a normal PAN Card.

Fee: Rs. 105/-

Time Taken – 15 days

 

Step 5: Open a Current Account

After obtaining the PAN Card, the firm has to open a current account and operate all its businesses through that account.

After that, you are all set to begin your business.

Nevertheless, let me offer you an unbiased opinion. Partnership firms are great for small businesses with faithful partners. But, when it comes to bigger investments, you should never opt for it. It brings in the headache of unlimited liability and puts your personal properties at stake. Thus, you cannot walk away unharmed like Vijaya Mallya if your businesses fail.

Secondly and the most important problem in a partnership firm is the requirement for a loyal partner. There is no leader in a firm. Every partner is bound by the acts of every other partner. It should not come to the situation where ‘too many cooks spoil the broth’. A disagreement between you two can dissolve the firm in minutes. So, beware!

Thirdly, it lacks a continuity as it does not have a legal personality. Mere death or withdrawal of a partner can end the firm’s life. Now, nobody wants to put a full stop that soon!

Anyways, I have given you all the pros and cons and the details in between. The choice is yours.

All the best for your business..!

 

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