Everything you need to know about Forming a Partnership Firm
In India, the Indian Partnership Act, 1932 governs all aspects of partnership formation and operations. A partnership is formed when two or more individuals come together with a common business goal, pooling their resources and funds with the aim of earning profits. Partnership firms are a popular business structure in India due to their ease of formation, operational flexibility, and minimal compliance requirements.
The formation of a partnership firm requires mutual consent among the partners. The firm must be established and registered following the procedures outlined in the Indian Partnership Act, 1932.
A minimum of two partners are required to form a partnership. However, the maximum number varies depending on the type of business. For banking businesses, the number of partners must not exceed ten, whereas for other businesses, the limit is twenty. Exceeding these limits results in the firm being deemed illegal.
Types of Partnership Firms
Under the Indian Partnership Act, a firm can be established as either an Unregistered or a Registered partnership firm. Both types are considered legal entities under the law.
Unregistered Partnership Firm
An unregistered partnership firm is formed through an agreement between partners without formal registration. Despite being legal, such firms face certain limitations, such as the inability to sue third parties or contracting parties in case of disputes. Internal conflicts must be resolved through arbitration or alternative dispute resolution methods.
Registered Partnership Firm
A registered partnership firm is one that is formally registered with the Registrar of Firms (RoF) within the jurisdiction of its business operations. Registration involves the payment of government fees, which vary by state.
Registering a partnership firm is recommended as it provides legal advantages such as the ability to initiate legal proceedings against third parties, easier resolution of internal disputes, and greater credibility for business expansion and conversion to other business structures. An unregistered firm can be registered at any time to avail of these benefits.
Steps for Partnership Firm Formation and Registration
- Drafting and Execution of Partnership Deed:
- The partnership deed should include key details such as the firm’s name, business location, nature of business, capital contribution, profit-sharing ratio, and other relevant terms.
- Payment of Stamp Duty and Notarization:
- The deed must be executed on non-judicial stamp paper or via franking as per state laws. It should be signed by all partners and notarized.
- Firm Registration with the Registrar of Firms:
- Though optional, registration is highly recommended. The application should be submitted with the prescribed government fees and necessary documents.
- Obtaining PAN for the Firm:
- A separate PAN must be obtained from the Income Tax Department, as the firm is treated as a distinct entity from its partners.
- Opening a Bank Account:
- A current account in the firm’s name should be opened for managing financial transactions.
Required Documents for Partnership Firm Formation
- Passport-size photographs of all partners
- PAN card copies of all partners
- Aadhaar card copies of all partners
- Valid address proof of partners (Driving License, Passport, Rental/Lease Agreement, or Bank Statement)
- Business address proof (Rental/Lease Agreement or property tax receipt for owned premises)
- Additional documents as required by the Registrar
Advantages of a Partnership Firm
- Easy to establish with minimal compliance requirements
- Greater flexibility in operations
- Shared responsibilities and risk
- Ability to expand and convert to other business structures over time
The partnership firm structure is ideal for small businesses requiring operational flexibility and low compliance costs. It also allows businesses to test their viability before scaling operations or transitioning to a more structured legal entity.
If you need any assistance in the Formation of Partnership Firm, please feel free to reach us at reachus@msassociates.pro or call us on 080-41633750 or 9880542668.