All you need to know before choosing partnership as a form of business

All you need to know before choosing partnership as a form of business

The moment you think of starting a business, you may think of a sole proprietorship form for a start i.e. when the business operations are small. As your business grows this form of business would not be able to grow beyond a certain limit because of the following two reasons:

  1. Funds Constraint: Sole proprietorship would not be an attractive form of business for banks to lend their monies as loans. Additionally, the amount of funds that a sole owner could introduce could not be very high.
  1. Management problem: A sole proprietor could not be an expert at all the fields, he might be good at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are pertinent for managing and making business decisions

For above reasons, a sole owner might enter partnership with somebody who could invest funds and expertise in the business to enhance its growth or one may choose to form a partnership firm right from the start.

Features of partnership firms in India

  1. It starts with the partnership agreement between partners
  1. There must be two or more members. The number of members should not exceed 10 in case of “banking business” and 20 in case of “other business”.
  1. There must be sharing of profits under this form, the manner and proportion of profit sharing should be incorporated in the agreement
  1. It is not compulsory that you register your partnership firm. However, if you don’t get your firm registered, you will be deprived of certain legal benefits

Factors to be considered

Benefits of a Partnership firm

  1. Easy to form: Since partnership can be formed in India without any compulsory registration, it becomes easy to form and operate under this structure. However, there are certain limitations of not getting the firm registered which are discussed at the end of this article
  1. Larger funds availability: The partnership firms enjoy a better credit worthiness from banks in comparison to a sole proprietorship firm which makes it easy for the firm to get loans and since the partners do the business together, the firm gets more funds in the form of capital contributed by partners.
  1. Improved management: As different partners, might be having different expertise, they could manage the areas of their expertise in a better way. Moreover, a partnership firm can always add more partners whenever they feel the need to get the required expertise.
  2. Flexibility in operations: Any change in the partnership with respect to its size, nature of the business or area of operation etc. can be done seamlessly with the consent of partners and without the need to follow any legal procedure.
  1. Sharing risks: True, partners share profits, but they too share business loss and risks which enables the partnership firm to take up more risk and hence they can expand their business easily with shared risk of failure.

Limitations of a Partnership firm

  1. No separate legal existence: Partners and Partnership firm do not have separate legal existence, i.e. partners and partnership firm would mean one and same entity in the eyes of law
  2. Unlimited liability: As there is no separate legal existence, all the partners in a partnership firm have unlimited liability i.e. they are jointly & severally liable for the debt of the firm.
  1. Uncertain life: As the firm has no separate legal existence from its partners. It can get dissolved or discontinued with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied partner can also give notice and dissolve the partnership at any time.
  1. Limited capital: Since there is restriction of maximum number of partners, the capital that can be raised is always limited. Further banks would prefer lending money to a registered company than a partnership firm
  1. Restriction on transferability of share: A partner in firm cannot transfer your share to outsiders, without the consent of other partners.

Compliances to be met

Here is the list of some general compliances under various laws which a private limited company must meet

Under Income Tax

  1. Filing of Income Tax Returns
  1. Tax Audit & Filing of Tax Audit Report – Mandatory in case sales, turnover or gross receipts of a business exceed Rs. One Crore in the previous year relevant to the assessment year.

Note

The effects of non-registration of partnership firm are:

  1. Your firm cannot take any action in a court of law against any other parties for settlement of claims.
  2. In case there is any dispute among partners, it is not possible to settle the disputes through a court of law.

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