Partnerships are a type of business where two persons can operate the business per the terms of their contract.
It is positioned on the hierarchy of different companies following sole proprietorship. It was developed to improve the sole proprietorship business model and allowed companies to raise capital and boost their intellectual contributions to the business.
Criteria of Partnership
The minimum number of partners required to create an association of partnership is two. However, there is a provision in the Companies Act to make a limitation on the number of partners who can be a part of a partnership firm.
- In the banking business, there must not be more than 10 partners.
- For businesses other than banking, the number of partners must not exceed 20.
If the limit is exceeded, the firm must be registered as a business under the companies act. If not, the firm will be deemed illegal.
Benefits of Partnership over a business
- In order to establish a partnership firm, a simple agreement will suffice; however, for companies, there’s the requirement for strict regulations that must be followed. It requires an enormous amount of time and effort to incorporate a business.
- The internal affairs of a firm are resolved through an easy consensus among partners. However, many institutional and statutory regulations must be adhered to when it comes to a business.
- The procedure for dissolving the partnership in a partnership can be similar to an agreement between the partners. However, for a business, there are a lot of institutional and legal rules that must be followed.
- Any revenue earned from the partnership will be divided between the limited number of partners. Thus, there is a substantial amount of motivation for partners to do their best. In a business, however, this isn’t the situation. The majority of the profits are kept in reserves. There’s less incentive.
The importance of partnership
A few crucial and fundamental features make the partnership form of an organization extremely valuable and superior to other types of organizations.
- The mutual agency of a partnership allows a partner to manage the company on behalf of other partners. Each partner acts as an agent and principal to each other. The actions of one partner are liable and binding to other partners.
- Control and decision-making in the case of a partnership company are that the partners make decisions based upon an agreement among the partners.
- A partnership’s continuation is impossible when any partner has a death, retirement, bankruptcy, or insanity. If the remaining partners want to keep the partnership, they may decide to do so by enforcing a new agreement.
The procedure for registering a partnership firm
Step 1: Choosing the name
Choose a name that is distinctive, unique as well as easy to recall. The firm’s business name must satisfy the requirements to be considered a legitimate business name. It is recommended to verify for existing trademark applications to avoid overlapping.
The guidelines for choosing a suitable name for a business are:
- The name of a partnership firm must not be similar or identical to other firms operating in the same industry.
- The partnership company’s name could contain the members’ names listed in the register of members.
- The name of partnership firms must be in line with the provisions of The Names and Emblems (Prevention of Improper Use) Act, 1950.
- Names of partnership firms could include suffixes like “and Company,” “and Co.” or “and Associates.”
- The name of the partnership company could use “And “/”&” to differentiate the principal name/center name/surname of the accomplice of the business.
Step 2: Draft the Partnership Deed
The next step of the registration process involves the preparation of the partnership deed. The partnership deed is the parent document of the partnership. Therefore, there is a need for reliable and secure drafting.
The components of a Partnership deed can be described as follows.
- Firm’s name.
- Name, address, and other details of partners.
- Date of the commencement.
- The proportion of allocation of the profits and losses.
- Interest on capital.
- The share of capital contribution by the partners.
- Salary to be paid.
- Settlement of outstanding debts with executors of deceased.
- Method of calculating the goodwill.
- The process for admission of a partner and the retirement of a partner.
There are additional clauses that are important to make the partnership agreement impervious to lawsuits in the future.
- The Capital Contribution clause in the Partnership deed regarding the partners’ capital contribution. It is not essential for all the partners to contribute initially, but it is an agreement among the partners.
- The Duty and Responsibility clause is crucial because partners join together to form an association. Each partner could have different objectives and goals to meet to prevent discord. The clause must be thorough enough to describe the responsibilities and obligations of each partner in all aspects.
- The Profit-Sharing clause lays out the percentage in which the profits will be divided. The main goal of any company is profit sharing.
- Dispute Resolution is essential since disputes always arise regardless of how hard the partners try to keep them from happening. But, the way to resolve the dispute should be decided at the beginning of the process.
- The Non-Compete clause requires the partners not to be involved in a similar kind of business, disclose any trade secrets or methods to competitors, or for personnel profit. It protects the exclusive interest of the firm partners.
Step 3: Notarize and Sign the Deed
When the deed is completed, it is examined by the partners and, if required, by an expert to ensure there are no technical mistakes. The final Deed will be printed on non-judicial stamp paper with 100/- or greater value, depending on the properties mentioned in the title. The parties are therefore requested to check the state stamp duty law of the state where the deed is registered.
The process of E-stamping shall be carried out to reduce the hassle of stamping physically. Stock Holding Corporation of India Limited is India’s latest E-Stamping recording agent.
The partners and their agents authorized by them must sign the deed in the presence of the other partners and the witnesses. It is customary for every partner to keep an original copy of the signed deed for reference.
Step 4: Applying for PAN
The partnership firm must get a separate PAN to comply with the law.
The acquisition of PAN can be completed before or after the partnership registration. In certain states, it is compulsory to acquire a PAN before the registration process is completed. Even if the company has not been registered, the PAN must be obtained by the company.
Step 5: Registering the Partnership Deed
In accordance with section 58 and Rule 3 of the Indian Partnership Act 1932, Form 1 must be filled by the partners. The registration process is handled by the registrar of firms (ROF) within the jurisdiction of the business’s location.
Step 6: Receiving Certificate
When the registrar is satisfied with the submitted documents, he will intimate any outstanding stamp duty or fees that must be paid. The costs vary depending on the area, and it is recommended to contact the registrar before the submission for any such fees to be paid.
After this process is completed, it will be sent to the business address. The company does not need to wait to operate until the certificate is received because the registration itself isn’t mandatory.