Partnership firms are the most common form of business organization in India. It refers to the type of organization in which there are two or more persons join together to engage in any business. The partnership firms are governed by the Indian Partnership Act, 1932. The objective of the act is to define and amend the laws regarding partnership in India.
A partnership firm can be started in India as a result of the contract and not as a result of any status and thus if any Hindu undivided family carries a family business they cannot be considered to be partners in a business.[i]
The term partnership is defined under the Act. It is the relationship between a group of persons mutually agreeing to enter into a contract to share the profits and losses arising out of any such business that they intend to carry on.[ii]
Essentials for a partnership firm:[iii]
1. There must be an agreement between the parties who are the partners to the firm
2. The partnership firm must be formed for any business purposes. The term “business” has been defined under Section 2 (c) of the Act.[iv]
3. There must be a mutual agency between the partners. Each and all partners must participate in the business activity of the firm.
4. The profits and shares obtained from such a business must be shared between all the partners.
5. Certain conditions are required to be fulfilled concerning the minimum number of members in the firm. For banking business to be carried out there must be a maximum of 10 members and for any other such business, there must a minimum of 20 members.[v]
Relationship between the Indian Contract Act and the Indian Partnership Act:
The partnership is a contractual relationship between the parties who are willing to indulge in business. The essentials of the contract are governed by the Indian contract Act. Thus certain terms are not defined under this Act and they have to be referred from the Contract Act, 1872.
Differences between Company Law and Partnership Act:
Registration of the Partnership Firm is not compulsory but the companies have to be registered with the ROC under the Act. However registration of the partnership firm helps in providing with the firm certain advantages which are mentioned under Section 69 of the Act.
- A partner of the registered firm can sue the co partners as well as firm in case of any dispute. Any registered firm can claim tax returns under the provisions of the Income tax Act.
- The third parties who have any dealings with that firm can sue the firm as well as any one of the partners to enforce their claim.
- The registered firm can also sue the partners or any third party to enforce their claim.
There is no minimum capital required to establish a partnership firm, however for a company to be established it must require a minimum capital requirement of 5 lakhs in case of public company and for private company it is 1 lakh.
Winding up process also differs. The partnership firm can be dissolved by any one of the partners of the firm, while the company cannot be wound up any of the members.
Tax liability in between the company and the partnership firm varies as well. The income of the partnership firm is taxed at a flat rate of 30% and an education cess as may be applicable. But, as far as companies are concerned, tax liability varies. Its income is taxed at the flat rate of 30% plus surcharges as may be applicable.
A partnership deed is an agreement between the partners of the firm that contains the rights, duties and other such conditions to be followed in the management of the firm. By signing this deed, the parties are obliging themselves to be binding to the agreement. Certain essential elements fulfill the partnership deed.
Essentials of a partnership deed:
1. Name of the Firm: There must a unique name to the partnership firm. Such a name must not have any resemblance with any other firm as it may injure the reputation of the firm. Any firm name must not include any of the terms like Crown, Emperor, Empress, Empire and any other words which express the patronage of the government.[vi]
2. Nature of business that the firm is going to carry on: The main motive of the firm is to engage themselves in any kind of business. The partnership deed must, therefore, specify the nature of the business the firm is going to carry on.
a. Name of the partners
b. Place of business
c. The capital that has been invested by each partner
d. Amount of salaries and commissions that are payable to the partners, if any
e. The loan and advances from the partners.
f. Duties, powers, and obligations of the partners
g. Certain other arrangements required to maintain the firm when any problem arises in the future.[vii]
When two people A and B agree to jointly sell 100 bales of cotton which they bought together. In the particular case, both A and B are partners concerning the cotton [viii]
There are certain advantages to starting a partnership firm. These firms are easy to form and dissolve. These firms have partners who bring in capital and this mutual contribution helps in the better functioning of the firm. The risk is shared between the partners as they equally contribute. Most of the businessmen prefer to start partnership firms as they involve reduced risks. However, when any loss occurs then the partners are personally liable for their property. Yet partnership is preferred in India because they can be formed and dissolved easily.
Edited by Pragash Boopal
Approved & Published – Sakshi Raje
[i] Section 5 of the Indian Partnership Act,1932
[ii] Section 4 of the Indian Partnership Act, 1932
[iii] Dulichand Laxminarayan V. CIT (AIR 1956 SC 354)
[iv] The term ‘business’ includes any trade, occupation, and profession.
[v] Section 464(1) of the Companies Act, 2013
[vi] Section 58(3) of the Indian Partnership Act.
[viii] Birdichand v Harakchand ( AIR 1940 Nag 211)