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Partnership Firm

Overview - What Is Partnership?

The law relating to partnership firm in India is prescribed in the Indian Partnership Act of 1932. This Act lays down the rights and duties of the partners between themselves and other legal relations between partners and third persons, which are incidental to the formation of a partnership. Thus, the Act establishes the position of a partner as well as a partnership firm vis-à-vis third parties, in legal and contractual relations arising out of and in the course of the business of a partnership firm. In this article, we look at the various aspects of running a partnership firm in India in detail.

A partnership is a relationship between individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all as stated in Section 4 of the Indian Partnership Act. Therefore, a partnership consists of three essential elements.

  • A partnership must be a result of an agreement between two or more individuals.
  • The agreement must be built to share the profits obtained from the business.
  • The business must be run by all or any of them representing the rest.

All these conditions must coexist before a partnership can come into existence.

Essential Elements of a Partnership

Some key elements are required for the formation of a Partnership. They are listed below with a brief explanation.

An Agreement

A partnership is the result of an agreement between two or more persons. It should be noted that this sort of a deal can arise only from a contract and not from status. This is why a partnership is distinguishable from a Hindu Undivided Family carrying on family business. The reason is that this kind of an alliance is a creation only out of a mutual agreement. Thus, the nature of a partnership is voluntary and contractual.

An agreement from which a partnership relationship arise may be express. It may also be implied from the Partnership Act done by the partners and from a consistent course of conduct being followed, showing a mutual understanding between them. This agreement may be in oral or in writing.

Sharing Profit of Business

When it comes to sharing profits of the business, two propositions are to be considered.

Firstly, there must be a business that exists. For this purpose, the term ‘business’ would generally mean every trade, occupation, and profession. The existence of a company is crucial. The motive of a business is the “acquisition of gains” that leads to the formation of a partnership. So, there can be no partnership where there is no intention to carry on a business and to share the profits obtained from the same. For example, co-owners who share the rent derived from a piece of land are not considered partners as a business does not exist. Similarly, no charitable institution or club may be called a partnership. However, a Joint Stock Company may be floated as a partnership for non-economic purposes.

Secondly, there must be an agreement concerning the sharing of profits. For example, A and B buy certain bales of cotton which they agree to sell on their joint account and to share the benefits equally. In such a situation, A and B are partners in respect to the business they have planned out. However, an agreement to share the losses is not an essential element that is considered. However, in the event of damages, unless agreed otherwise, these must be borne in a profit-sharing ratio.

Running the Business

The third requirement for a partnership is that the business must be carried on by all the partners or by one or more of the partners acting for all. This is the crucial principle of the partnership law. An act of one partner in the course of the business of the firm is, in fact, an act of all partners. A partner carrying on a business is the principal as well as the agent for all the other partners. Therefore, it should be noted that the real test of a partnership is a mutual agency rather than sharing of profits. If the element of interactive agency is absent, then there will be no partnership. Sharing of benefits is the only Prima Facie evidence which can be rebutted by stronger evidence. This, this prima facie evidence can be countered by proving that there is no mutual agency.

Distinction between Partnership and Firm

Individuals who have entered into a partnership with one another are called Partners individually. The partners may be called collectively as the name under which the business is carried on is called the name of the Firm. A partnership is merely an abstract legal relationship between the partners. A firm is a concrete object signifying the collective entity for all the partners. Thus, a partnership is an invisible bind that holds the partner together, and a firm is the visible form of this partnership which is, therefore, bound together.

Types of Partnership Firm In India

These are the two different kinds of partnerships.

Joint Venture at Will

A partnership by will is one in which the partners haven't made any agreements regarding how long their partnership will last or how it will be decided.

Specific Partnership

A specific partnership occurs when one person joins forces with another person in a specific business enterprise or for a specific business venture or undertaking, such as building a road, laying railroad tracks, etc. This kind of collaboration will dissolve after the task for which it was initially formed is finished.

Various Partner Types

Based on the level of liability in a firm, the partners can be differentiated into different classes.

Partner: Active, Actual, or Ostensible

when a partner in a partnership firm joins by mutual consent. Actively takes part in managing the cooperation. For all actions taken during the regular business life cycle of the company, the partner of the firm represents the other partners. When a partner retires, they are required to publicly notify the public in order to release themselves from responsibility for any actions taken by the other partners after their retirement.

Dormant Partner

An inactive partner is one who is a partner by legal arrangement but is not actively involved in the management of the company. These partners are liable to third parties, responsible for the partnership firm's commercial operations, and share in profits and losses. They are not required to make their decision to leave the partnership firm public, though.

Principal Partner

A notional partner is someone who engages in this without holding any actual equity in the business. Such a sponsor is not qualified to share in the company's earnings. This partner has no ownership stake in the business and is not involved in its management. However, this partner is liable to other businesses for all the firm's operations.

Profit-Share Partner

This is a partner who is entitled to a share of the profits but who is not liable for them. Only third parties can hold such a partner responsible for the actions of the gain.


A partner in a partnership deed registration who agrees to divide the company's profits with a third party is referred to as a sub-partner. Sub-partners have no rights against the company and are not liable for any obligations of the company.

Prospective Partners

They are individuals who are accepted as partners into an established business with the consent of all the existing partners. Such a partner is not responsible for any conduct that occurred before becoming a partner in the company.

Previous Partner

A departing partner is a partner who leaves a partnership while the other partners are still in charge of the business. Such a partner is nonetheless accountable to third parties for all firm acts until he gives a formal notice of retirement.

Partner by Holding Out (Section 28)

This type of partnership registration is also referred to as partnership by estoppel. In this scenario an individual can hold themselves as a partner or permit another person to do the same. Whenever an individual represents himself as a partner in a partnership firm registration in india then they are liable to any individual who has trusted this representation and provided credit to the organisation.

Benefits of A Having a Partnership Registration

Minimum Compliance

Whenever a private limited company is involved, something else always gets in the way (unless you hire someone to handle this for you). You avoid this hassle when you form a partnership. Seriously you don't want to start out your business burdened with compliance work. You simply want to concentrate on your company.

Simple to Begin

One of the simplest types of businesses to launch is a partnership. In most cases, a partnership deed is the only necessity for register partnership firm in india. As a result, a partnership can be established today. On the other hand, an LLP enrollment would take between 5 and 10 working days to complete because the MCA must be contacted for the electronic signature, DIN, name approval, and incorporation.

Comparatively Economical

You will have to pay at least ₹15,000 to establish a private limited company, not to mention compliance and auditor fees. When you're just getting started, do you want all this baggage? A partnership, however, will only set you back about ₹2,000.

Info graphic for the Process:

Step 1 : Reach out to usStep 2 : Submit the documents Step 3: Get your partnership
deeds first draft Step 4: Sign the documents Step 5: Register your partnership deed

Characteristics of Partnership Firm Registration Online

1. Number of Partners: A partnership must have at least two partners. When performing banking transactions, the maximum is 10; in all other situations, the maximum is 20.

2. Voluntary Registration: Although it is not required to register a partnership, it is always advisable to do so because doing so has many additional advantages.

3. Contractual partner: There is a contractual tie between each partner. A original partnership deed format proposes that in order on various aspects governs the relationship. Each and every partner signs the deed, binding each and each of them.

4. Competency of the Partners: According to the Act, the partners entering into the agreement must be competent adults and cannot be minors.

5. Profit and Loss Sharing: The partners divide the profits or losses according to the percentages that were agreed upon and recorded in the agreement.

6. Unlimited Liability: In all partnership firms governed by the aforementioned Act, each partner is jointly and severally liable for any losses incurred by the firm.

7. Interest Transfer: A partner's interest may not be transferred without the other partners' approval.

8. Principal-agent relationship: Partners and the firm have a principal-agent relationship. The agent acts on behalf of the company, so it is expected that he will act in the company's best interests. Any one of the partners may act on behalf of the other partners, or the entire partnership may carry out the business jointly.

What Are the Consequences if the Partnership Firm Is Not Registered?

If the partnership firm is not registered, the partners of the aforementioned firm may in fact enforce their rights under the terms of the Indian Partnership Act, 1932. This means that the involved firm is not permitted to file a lawsuit or make a setoff claim in the event of any dispute with a third party. However, the unregistered partnership firm is subject to third-party litigation.

Tax Compliance After Obtaining Partnership Firm Registration Online

  • After the registration process for the partnership firm is officially initiated, the partners of the aforementioned partnership firm must receive PANs (Permanent Account Numbers) and TANs (Tax Deduction Account Numbers) from the IT department
  • No matter how much money is made or lost, a partnership firm in india must file an ITR (Income Tax Return)
  • In the case of a register partnership firm, the total income will be taxed at a rate of 30% plus an additional income tax surcharge
  • Furthermore, a tax audit must be performed by all partnership firms with a yearly revenue of over ₹100 lakhs.

Businesses that generate more than ₹40 lakhs in annual income must register for GST online (₹20 lakhs in the case of the north-eastern states). However, businesses involved in e-commerce, market place aggregation, and export-import must register for GST in order to operate.

After registering for GST, the concerned firm is required to submit monthly, quarterly, and annual GST returns. Partnership firms must also submit their quarterly TDS (Tax Deducted at Source) returns, which must deduct tax at source in accordance with the applicable TDS rules and have TANs.

Last but not least, all partnership firms must obtain an ESIC registration and file an ESIC return.


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FAQ about Partnership-Firm

There are restrictions on the Transfer of ownership interest in a Partnership Firm. A Partner cannot transfer his or her interest in the firm to any person without the consent of all other partners.

A Partnership deed is an agreement between the Partner that highlights the terms and the rules of the Partnership among the Partners.

In a Partnership firm, a minimum of 2 members are required and a maximum of 20 partners are allowed.

The Partnership firm and the partners are the same in the eyes of the law. In Partnership firms, the liability of the Partners is also unlimited and all the Partners are said to be jointly and severally liable for the liabilities of the firm. Hence, No Partnership firm doesn't have separate legal existence of its own.

Yes, there's a specified procedure for converting a Partnership firm into a Company or LLP. However, the procedure is very cumbersome and time-consuming. It will be wise if an entrepreneur considers starting an LLP or a Company instead of a Partnership firm.