A Partnership is one of the most basic forms of a business organisation. Two or more people come together to form a business and divide the profits thereof in an agreed ratio. A Partnership is easy to start, and the compliance is minimal as compared to companies.

The challenge becomes real when multiple partners decide their terms for the business operation of a firm. This diversification of opinions has many legal and compliance angles to deal with. Leave Such matters to experts like us!

At least two Individuals must pool resources to start a partnership firm. The Partnership Act, 1932 does not specify any maximum limit on the number of partners. However, the Companies Act, 1956 lays down that any partnership or association of more than ten persons in the banking business and 20 persons in other types of business is illegal unless registered as a joint-stock company.

A partnership comes into existence with agreement be­tween parties to enter into a contract. The agreement should be written to make everything black and white clear the fog surrounding all knotty issues.

The partners in a firm can take up only legitimate activi­ties. Any illegal activity carried out by partners does not enjoy legal sanction. Moreover, they can put you in lots of trouble.

Under the Partnership Act, registration of a partnership firm is not compulsory in any manner. (In fact, in most states in India, registration is voluntary). If the partnership firm isn't registered, it cannot obtain certain legal benefits. The effects of non-registered firms are- (i) the firm cannot file a legal suit or take any action against any other parties for settlement of claims and (ii) in case of a dispute between partners, it is not possible to settle the disputes through a court of law.

The partnership agreement must specify everything in detail with minute accuracy and transparency. The matter of sharing profits and losses among partners have to be utterly mentioned in them. A charitable hospital, an educa­tional institution run jointly by like-minded persons, is not to be viewed as a partnership since there is no sharing of profits or losses. However, mere sharing of profits is not conclusive proof of partnership. In this sense, employees or creditors who share profits cannot be called partners unless there is an agreement between the partners.

Generally speaking, every partner is considered an agent of the firm and other partners as well. Partners have a close relationship among themselves; this is the sole reason they came together to form the partnership firm. The business can be carried out jointly by all partners together or run by one nominated partner on behalf of all. Any acts done by a nominated partner in good faith and on behalf of the firm are binding on other partners and the firm.

All partners are together responsible for all activities carried out by the partnership firm. In other words, in all cases where the firm's assets are not sufficient to meet the obligations of creditors of the firm, the partners' private assets can also be attached. The creditors can get hold one anyone partner —who is fi­nancially sound-and get their claims satisfied.

The firm does not have a personality of its own. The business gets terminated in case of death, bankruptcy or lunacy of any one of the partners.

A partner cannot transfer his interest in the firm to outsiders unless all other partners agree unanimously. A partner is an agent of the firm and is ineligible to transfer his interest unilaterally to outsiders.

A partnership firm is built around the principle of mutual understanding among partners. Each partner is supposed to bring the talent of his own to benefit all. If faith is broken and partners work at cross purposes, the firm will get crushed under its weight.

The following are some of the major advantages of a partnership firm:

Easy to Start

Partnership firms are the most accessible type of entity to start. The only requirement for creating a partnership firm in most cases is a partnership deed. Hence, You can start a partnership firm on the same day. On the other hand, an LLP registration would take about 5 to 10 working days, as the digital signatures, DIN, Name Approval and Incorporation must be obtained from the MCA.

Decision Making

Decision making is the crux of any organization. Decision making in a partnership firm could be faster as there is no concept of the passing of resolutions. The partners in a partnership firm enjoy a wide range of powers and in most cases can undertake any transaction on behalf of the partnership firm without the consent of other partners.

Raising of Funds

Trust is a significant factor in a partnership firm compared to a proprietorship firm; it can quickly raise funds. Multiple partners make for a more feasible contribution among the partners. Moreover, banks also view a partnership more favorable while sanctioning credit facilities instead of a proprietorship firm.

Sense of Ownership

Every partner manages different activities of their firm. Partners responsibilities might be varied, but people in a partnership firm are united for a common cause. Ownership creates a higher sense of accountability, paving the way for a diligent workforce.

The disadvantages of a partnership firm are as follows:

Unlimited Liability

Every partner is liable personally for the losses of a partnership firm. The liability created by a partner in the partnership firm will also make each of the partner personally liable. To limit the liability of partners in a partnership firm, the LLP structure was created by the Government.

Number of Members

The maximum number of members a partnership firm can have is restricted to 20. In case of an LLP, there is no restriction on the maximum number of partners.

Lack of a Central Figure

Leadership can both uplift and derail a firm. Combined ownership takes away the possibility of leadership and lack of leadership leads to directionless operations. On the other hand, in a partnership firm, certain partners can be given the position of designated partner with more powers and responsibilities.

Trust of the General Public

A partnership firm is easy to start and does require any registration. A partnership firm can also operates without much of a structure or regulations. Hence, it often leads to distrust amongst the general public.

Abrupt Dissolution

A partnership firm would be dissolved due to the death or insolvency of a partner. Such an abrupt dissolution will hamper a business. On the other hand, the death of a partner will not automatically dissolve an LLP. Hence, continuity of business is maintained in a LLP.

1. Income Tax at a flat rate of 30% is levied on Partnership Firms and LLP’s. Computation of taxes as per Income Tax Slab Rates is not allowed as the benefit of Slab Rates is only available to Individuals and HUF’s. Education Cess @ 2% and SHEC @ 1% would also be required to be paid. Moreover, in case the income of the partnership firm is more than Rs. 1 Crore in any financial year, Surcharge @ 10% would also be payable.Income Tax Slab Rates is not allowed as the benefit of Slab Rates is only available to Individuals and HUF’s. Education Cess @ 2% and SHEC @ 1% would also be required to be paid. Moreover, in case the income of the partnership firm is more than Rs. 1 Crore in any financial year, Surcharge @ 10% would also be payable.
2. Capital Gains arising from the sale of any asset by the partnership firm are taxable under Section 112. Moreover, in case of sale of shares and mutual funds, in case the period of holding is less than 1 year – the income would be taxable under Section 111A at a flat rate of 15% and in case the period of holding of shares is more than 1 year – the income would be exempted from the levy of tax under Section 10(38). by the partnership firm are taxable under Section 112. Moreover, in case of sale of shares and mutual funds, in case the period of holding is less than 1 year – the income would be taxable under Section 111A at a flat rate of 15% and in case the period of holding of shares is more than 1 year – the income would be exempted from the levy of tax under Section 10(38).
3. Remuneration and Interest is allowed to be paid to the partners. However, the tax deduction for remuneration and interest paid to the partners is allowed subject to the limits and conditions specified in Section 40(b)

Often, the Partner introduces capital in the Partnership by way of transferring assets to the Partnership Firm. In such cases, provisions of Section 45(3) would be applicable, and the amount recorded in the books of accounts of the Partnership Firm would become the Sale Consideration received in the hands of the Partner and tax would be levied in the hands of the Partner based on the Sale Consideration Received.

Corporations can enter into a business relationship as partner because corporations can operate in many of the same ways that an individual can. Specifically, the two things required to enter into a partnership are the ability to own property and the ability to sign contracts, both of which can be done by corporations.

As corporations often have more legal and financial protections for those who manage them, there are some advantages to entering into a partnership with a corporation. Additionally, as corporations are typically much larger than other business structures, they can have many shareholders, which can greatly increase the resources of the company with whom they are entering into the partnership. Another advantage to forming a business partnership with a corporation is that should the CEO (or equal position) of the corporation pass away, resign, get fired, or otherwise no longer be serving in that capacity, the partnership is not affected as the board of directors can take over in that role.

Entering into a new business relationship often times cannot be made unilaterally. Rather, it is a decision that will have to be voted on by the shareholders. The obvious exception to this, of course, being as it pertains to Sole Proprietorships.