Metiscon Solutions

REGISTER START-UP AS PARTNERSHIP

When two or more individuals enter into an agreement to manage and operate a business they form a partnership. The members are individually partners and share the liabilities as well as profits of the firm in a predetermined ratio. It is suitable for small businesses that do not want to grow aggressively or have contracts with large liabilities. Low costs, ease of setting up and minimal compliance requirements make it a sensible option for such businesses.
Partnerships in India are governed by the Indian Partnership Act, 1932. Although partnerships may be verbal there could be a lot of confusion in such situations. Further these are not valid in terms of the taxation law. In the commercial world typically the respective rights and obligations of the members of a partnership is written into a formal document called the partnership deed. Typically the partnership deed invariably contains certain basic details such as  

  1. Name of the firm (tradename) and business address
  2. Names and Addresses of all the partners
  3. Date of Commencement of business
  4. Duration of Partnership (whether for a fixed period/project)
  5. Nature of business to be carried on
  6. Capital contribution by each partner
  7. Profit sharing ratio among the partners

These details are the bare minimum details that are specified in all partnership deeds. Certain additional clauses are very common. Some of these clauses are

  1. The duties, powers and obligations of all the partners
  2. Processes to be followed for admission and retirement of a partner – how death of a partner is to be handled.
  3. Interest on partner’s capital and loan
  4. Interest to be charges on withdrawals.
  5. Day-to-day management decisions – which decision can be by majority and which are unanimous
  6. Salaries and/or commissions payable to partners or how they will be agreed upon
  7. Method of preparing accounts and arrangement for audit

The above are just some examples of additional points which the partners may mention in the partnership deed –there could be many more depending on the nature of business and relationship/agreement between the partners.
With the advent of Limited Liability Partnerships (LLPs) has been losing popularity although they remain in vogue for small businesses especially those not looking for any debt

OTHER RELATED SERVICES

REGISTRATION
GOODS AND
SERVICES TAX

Most businesses choose to register for GST right from the beginning even if it does not apply to them immediately since it has multiple advantages.

REGISTRATION PROFESSIONAL TAX

Has to be done within 30 days of setup. in many states even if there are no employees when the business starts its journey.

REGISTRATION
SHOPS AND ESTABLISHMENTS

A law driven by welfare of workforce almost all businesses fall within the scope of this state law and are required to register within 30 days

REGISTRATION
UDYAM AADHAR
CERTIFICATE

A facilitating legislation for the benefit of Micro Small Medium Enterprises (MSME) this provides access to a host of benefits for the business

IS REGISTRATION OF PARTNERSHIP MANDATORY

Registration is optional for general partnerships – it is not compulsory (other than in the state of Maharashtra). As per the Partnership Act, Registration of Partnership Firms is optional and so the Partners may or may not register their Partnership Agreement. Registration of Partnership Firm may be done before starting the business or anytime during the continuance of partnership.

ADVANTAGES OF REGISTRATION OF PARTNERSHIP

The benefits of registering a partnership firm are mentioned in Sec 69 of the Indian Partnership Act

  1. Legal remedy: There may be a dispute among the partners or between a partner and the firm or between a partner and ex-partners. If the dispute is based upon the rights arising from contract (in this case the partnership deed) or upon the rights given by the Partnership Act, then a partner of a registered firm can always file a case in the court. BUT this power is not available to the partner of an unregistered firm.
    However, a criminal proceeding can be brought by a partner of an unregistered firm against the other partner(s). For example if a partner steals the property of the firm or puts fire to the buildings of the firm, any partner can prosecute him for the same.
  2. Legal remedy/relief of firm against third parties: The partners of a registered firm can always file a case in the court (if required), to enforce any right arising from contract e.g. for the recovery of the price of goods supplied. BUT this power is not available to the partners of an unregistered firm (except in case of criminal proceeding).
    It should however be noted that although an unregistered firm cannot file case against any third party they have the power to file a case against both registered as well as unregistered firm.
  3. Power to claim set-off claims of third parties: If a third party sues the firm to recover a sum of money the registered firm can always claim a set-off i.e. the registered firm can say that the third party also owes some money to the firm and the same should be adjusted against the claim in question. This power is not available to an unregistered firm.

Partnership firms are registered by the Registrar of Firms in the respective states under the Indian Partnership Act, 1932 by filing of Form A1 with other documents that need to be attached

REGISTRATION OF FIRM WITH REGISTRAR OF FIRMS IS DISTINCT FROM REGISTRATION WITH TAXATION AUTHORITIES BE IT PAN OR TAN OR GST

DOCUMENTATION FOR FIRM REGISTRATION

There are two basic documents that are to be submitted to the Registrar of Firms for registration

  1. Form A – duly completed with all details and supporting documents attached as applicable as given below
  2. Notarised copy of the partnership deed

DOCUMENTS REQUIRED - PARTNERS

COMPULSORY

  1. Passport size photograph
  2. PAN Card – scan of front and reverse
  3. Aadhaar Card – all 12 digits must be clearly visible

IDENTITY PROOF - any one document

  1. Passport
  2. Driving License
  3. Voter ID

ADDRESS PROOF - any one document

  1. Electricity Bill
  2. Bank Statement
  3. Landline or Broadband bill
  4. Mobile Phone Bill

** (1) Bill should be in the name of partner – joint names are acceptable (2) Bill should be less than 60 days old.

DOCUMENT REQUIRED FOR PLACE OF BUSINESS

OWNED BY PARTNER

  1. Electricity Bill OR   Landline Bill   OR Broadband bill   OR Gas Bill
  2. No Objection certificate from director

** (1) Proof of ownership like sale document may be called for by Registrar it considers it necessary. (2) Utility bill must be less than 60 days old at time of application

RENTED OFFICE PREMISE

  1. Rental Agreement
  2. Electricity Bill OR Landline Bill OR Broadband bill OR Gas Bill
  3. No Objection certificate from landlord

** Utility bill must be less than 60 days old at time of application

** THE ABOVE DOCUMENTS WILL ALSO COVER FOR APPLICATION OF PA, TAN AS ALSO GST WHERE REQUIRED

STEPS TO REGISTER YOUR PARTNERSHIP FIRM

WHAT FACTORS YOU SHOULD CONSIDER

Once you have a vision for your business you will need a vehicle or structure for delivering it which is the organisation. To choose the format of the organisation you will need to consider recognisation of the structure or credibility, risk associated with it, speed and flexibility of decision making, ability to quickly scale up and and ease of access to funding. CONGRATULATIONS ON CHOOSING A PARTNERSHIP FIRM AS THE ONE MOST SUITABLE FOR YOU

THIS IS THE BEGINNING OF YOUR BRAND

Giving your organisation a name and getting it approved is initiation. Once name is approved you can also consider booking a domain name and possibly getting it trademarked sometime in the future. Tradename is required whether the partnership is registered or unregistered

PARTNERS, PLACE OF BUSINESS & AFFIDAVITS

Documents pertaining to the identity and address proof of the partners and place of business and mentioned above need to be collected. This is required to complete Form A to file for registration of the firm

DOCUMENTS THAT DEFINE THE FIRM

Due care must be taken to draft the critical partnership deed after due and detailed discussed between the partnership to ensure that all potential areas of dispute and misunderstanding are defined with utmost possible clarity right in the beginning so that the business has a smooth successful journey

REGISTRATION

Application is made in Form A and all attachment of proof of identity, address, are enclosed along with notarised copy of partnership deed.

PAN TAN & OTHER CERTIFICATIONS

You need to get stationery and visiting cards done, book your domain and open bank account for the company. Over the next month you need to have the first board meeting and possibly get registered for GST, MSME, Shops & Establishments and Professional Tax. You also need to appoint the first auditors, print and send share certificates, apply for certificate of commencement of business

WHAT FACTORS YOU SHOULD CONSIDER

Once you have a vision for your business you will need a vehicle or structure for delivering it which is the organisation. To choose the format of the organisation you will need to consider recognisation of the structure or credibility, risk associated with it, speed and flexibility of decision making, ability to quickly scale up and and ease of access to funding. CONGRATULATIONS ON CHOOSING A PARTNERSHIP FIRM AS THE ONE MOST SUITABLE FOR YOU

THIS IS THE BEGINNING OF YOUR BRAND

Giving your organisation a name and getting it approved is initiation. Once name is approved you can also consider booking a domain name and possibly getting it trademarked sometime in the future

DIRECTORS, PLACE OF BUSINESS & AFFIDAVITS

Documents pertaining to the identity and address proof of the director,nominee and place of business and mentioned above need to be collected. Declarations and affidavits also need to be done

DOCUMENTS THAT DEFINE THE ORGANISATION

Due care must be taken to draft these critical documents that define the organisation: in layman terms the Memorandum of Association (MoA) defines the scope of business while the Articles of Association (AoA) define the internal rules of management of the organisation

INCORPORATION

Application made all attachment of proof of identity, address, affidavits, MoA and AoA and if in order company get incorporated with CIN number for company & DIN number for directors whilst the income-tax department gives PAN & TAN number

PAN TAN & OTHER CERTIFICATIONS

Time for business but to get started you need the PAN and TAN number. Also you need to get Professional Tax employer and possibly Shops & Establishments. Business may need voluntary GST registration. Alongside you need to get stationary ie. letterheads and visiting card for the partners and set up your website. You need to open a current account in your tradename and you are good to go

TIMELINE FOR INCORPORATION OF COMPANY

OUR PARTNERSHIP REGISTRATION PACKAGES

FEATURES OF PARTNERSHIP

Structure & Ownership

  • A minimum of two Persons is required to start a Partnership firm. A maximum number of 20 Partners are allowed in a Partnership firm
  • A partnership firm has no separate legal existence of its own i.e., the Partnership firm and the partners are one and the same in the eyes of law. Liability of the Partners is also unlimited, and the partners are said to be jointly and severally liable for the liabilities of the firm. This means that if the assets and property of the firm is insufficient to meet the debts of the firm, the creditors can recover their loans from the personal property of the individual partners.
  • The partners must be an Indian citizen and a Resident of India.
  • There are restrictions on the transfer of ownership interest in a Partnership firm. A Partner cannot transfer his/her interest in the firm to any person (except to the existing partners) without the unanimous consent of all other partners.

 Partnership Deed

  • The partnership deed will determine the ownership of the firm, profit sharing ratio, rights and responsibilities of each of the Partner. Typically the deed should contain names of the partners and their addresses, the partnership name (business/trade name), the date of commencement of operation of the firm, any capital invested by each partner, the type of partnership and profit-sharing matrix, rules and regulations to be followed for intake of partners or removal.
  • If the Partnership firm is registered, the Partnership deed will be registered and a Registration Certificate will be issued by the Registrar of Firms.

 Business Name/Trade name

Since the name of a Partnership firm is not registered, a Partnership firm can choose to have any name – as long as it does not infringe on a registered trademark.

 Bank Account

Bank account can be opened in the name of a Partnership firm. To open bank account, the partnership deed copy and KYC documents of the partners must be submitted along with any other document as required by the Bank

 Regulatory Aspects

  • Partnership firm will have to file their annual tax return with the Income Tax Department.
  • They would also have to file necessary returns under GST and other applicable laws.
  • Audit is not required unless the turnover exceed 40lakh (for income tax) or 2 crores (for GST)
  • Annual report or accounts need not be filed with the Ministry or Corporate Affairs, which is required for Limited Liability Partnerships and Companies.

ADVANTAGES AND LIMITATIONS OF PARTNERSHIP

ADVANTAGES OF PARTNERSHIP

  1. Quick and Easy Formation: Like sole proprietorship, partnership form of organisation can be formed with minimum formalities. A simple agreement which may be oral or written is sufficient to enter into partnership form of organisation. Even the registration of partnership is not compulsory.
  2. Larger Resources: The partnership form of organisation enjoys large resources than a sole proprietorship so that the scale of operation can be enlarged to get the benefit of large-scale economies. After starting business, more partners can be taken into partnership if capital needs are large. The partnership firms can also arrange money from the outside sources.
  3. Risk Sharing: Any loss sustained by the firm will be borne by all the partners equally with the benefit that the burden borne by each partner will be much less whereas the sole proprietor has to bear the entire loss of the business.
  4. Flexibility: The business format is highly flexible since legal restriction flowing from the format itself on its activities is not there. The partners can introduce any change they consider desirable to meet the changed circumstances.
  5. Combined Talent: Pooling of ability, experience, and talents of the partners is a big advantage as compared to the sole proprietor – this is more so in non-traditional businesses where a variety of skills is required.
  6. Confidentiality: The partners of partnership firm keep business details to themselves since they are not required to publish their accounts even if audited.
  7. Fast Decisions: The partners of partnership firm exercise joint responsibility and meet frequently. This enables them to take decisions promptly, which is conducive to taking advantage of sudden opportunities.
  8. Direct Reward and Work Relationship: In partnership form of business organisation, there is an direct relation between reward and work. This enables the partners to put more labour to earn more and more profits. The more they work, the more will they be benefited.
  9. Easy Dissolution: Dissolution of the partnership concern is comparatively easy. The partnership can be dissolved on the death, lunacy or insolvency of a partner. There are no legal formalities involved in the dissolution. If the partnership is ‘at will’ then any partner can get the partnership firm dissolved by giving notice to other partners.

LIMITATIONS AND POSSIBLE DOWNSIDES

  1. Disputes between partners: There are chances of lack of harmony amongst the partners leading to mismanagement and disinterest. Ultimately this can result in disruption and dissolution of the firm.
  2. Limited Resources: The limit that more than twenty cannot be member of partnership form of business organisation, limits the amount of capital that can be raised. In practice for ensuring smooth functioning the number of partners is typically far fewer than the maximum allowed.
  3. Instability: This form of organisation may come to an abrupt end on the death, lunacy or insolvency of the partner since the money abilities and other factors considered when forming the partnership gets deeply impacted.
  4. Lack of Public Faith: Since partnerships are not subjected to the same standards of governance and transparency like a company it is often seen as opaque and does not inspire public confidence.
  5. Restriction on Transfer of Interest: Transferability of interest to third is much easier in an LLP or company as typically concurrence of all partners is required. This restricts the liquidity of investment.
  6. Liability after Retirement: In partnership form of business organisation, the retiring partner continues to be liable for all acts done when he was a partner unlike a format of limited liability where the liability of the shareholder ceases immediately on the transfer of shares.

So this form of organisation is suitable where the size of business is relatively small and the capital requirements are not high – thus it is most popular among lawyers, chartered accountants, doctors, solicitors and estate agents

A COMPARISON OF ORGANISATION FORMATS

CRITERIAPRIVATE LIMITED COMPANYLIMITED LIABILITY PARTNERSHIPONE PERSON COMPANYPARTNERSHIPPROPRIETOR
Is Registration CompulsoryRequiredRequiredRequiredOptionalNo
Registration under the Act is mandatory to set up Private Limited CompanyRegistration under the Act is mandatory to set up LLPRegistration under the Act is mandatory to set up One Person Company
Both registered and unregistered partnerships are there but registered partnership preferred because of many advantagesRegistration is recommended to get the advantages of operating in a tradename
Is there a law specifically for thisYesYesYesYesNo
The Indian Companies Act 2013Limited Liability Partnership Act, 2008The Indian Companies Act 2013Indian Partnership Act, 1932Not Applicable
What is the minimum and maximum number of members2-20012 – Unlimited2-501
Requires minimum 2 and can have maximum 200 shareholdersMinimum 2 Designated Partners are required No bar on maximum number of partners: all partners need not be designated partnersOnly an individual Indian resident can be the shareholder: however there has to be one nominee alsoIt needs minimum 2 partners and can have maximum 50 partnersOnly one person being the business owner
Is it a separate Legal EntityYesYesYesNoNo
It can buy, hold, sell assets and contract liabilities in its' own nameIt can buy, hold, sell assets and contract liabilities in its' own nameIt can buy, hold, sell assets and contract liabilities in its' own nameIt has no existence which is separate or distinct from its' partnersIt has no identity separate from its' business owner
Do the members have protection from liability - is the liability limitedLimitedLimitedLimitedUnlimitedUnlimited
Liability of members is limited to the value of shares subscribedLiability of members is limited to the value of capital committed by partnersLiability of members is limited to the value of shares subscribedPartners are jointly and severally liable to pay the debts of the Partnership FirmProprietor is liable to pay the debts of the business
How are they taxed ModerrateHighModerateHighLow
Tax rate applicable for small companies is reduced to 22%With tax rate of 30% on business profit, tax benefits to partners is highTax rate applicable for small companies is reduced to 22%With tax rate of 30% on business profit, tax benefits to partners is highTaxed at par with individual
Is Audit mandatoryMandatoryDepends on circumstancesMandatoryDepends on circumstancesDepends on circumstances
Auditor must be appointed within the 30 days of incorporationApplicable when turnover exceeds INR 40 Lakh or contribution exceeds INR 25 LakhAuditor must be appointed within the 30 days of incorporationStatutory audit not applicable. Tax audit may be applicable based on turnoverStatutory audit not applicable. Tax audit may be applicable based on turnover
How are legal compliances and formalitiesHighModerateModerateLowLow
Apart from Annual filings, it has to comply with various provision laid down, but less compared to public companyAnnual filing and few event based filings are necessaryApart from Annual filing, compliances are less compared to Private CompanySeparate ITR of partnership is filed, else there is no filing requirementSeparate ITR of partnership is filed, else there is no filing requirement
Can ownership be easily transferredRestrictedRestrictedOpenRestrictedOpen
Shares can be transferred only with the consent of other ShareholdersOwnership can be changed with consent of other partnersOne member can easily transfer his/her sharesOwnership can be changed with consent of other partnersOwner can easily sell/transfer the business

FAQs ON PRIVATE LIMITED COMPANY

Partnerships in India are governed by the Indian Partnership Act 1932
Registration means registration under the Indian Partnership Act with the Registrar of firms. It does not refer to registration under the Income Tax Act, GST or any other law. Registration of partnership is not compulsory. However it is recommended that firm be registered because of various advantages
For partnership the minimum of two members is required. The upper limit on number of partners are fixed under Companies Act and not in Partnership Act. As per Indian Companies Act, 2013 a Partnership firm can have maximum 10 partners for any banking business and 100 partners in any other case.
For a partnership apart from the partnership apart from the partnership deed the following are required 1) Photographs of the partners and their proof of identity 2) Proof of address of all partners 3) Proof of place of business
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