What is Partnership?
In general terms, a partnership is an association of two or more like-minded persons who share common goals to establish and run a lawful business to earn profits.
Section 4 of the Indian Partnership Act, 1932, states that a partnership is a relation between persons who have agreed to share profits of a business carried on by all or one of them acting for all.
Elements of Partnership
A partnership has three essential elements, viz;
- It is an agreement entered into by all persons concerned.
- It is created for the distribution of profits of the business.
- The management of the partnership is by mutual agency, i.e. by all of them, or any one of them acting for all.
The most important is the mutual agency, which distinguishes a partnership from other contractual relationships. If there is no mutual agency, the partnership fails.
Every individual in the partnership is called a partner, and the group of partners collectively is called a firm. Every partner is not only an agent of the firm but also to other partners.
Who Can Be a Partner in a Partnership?
According to Section 4 of the Indian Partnership Act, only natural and legal persons can be partners in a partnership firm. A partnership relationship is contractual, and hence, only persons who are eligible to enter into a contract can enter into a partnership.
A firm or a Hindu Undivided Family (HUF) is not a legal person and cannot become a partner in a partnership firm. So, when the Karta of a Hindu Undivided Family becomes a partner in any firm, the Hindu Undivided Family cannot by default become the partner in that firm, but rather only the Karta.
A minor cannot be a partner in a firm but can be entitled to the benefits of the partnership. A minor is entitled to share in profits and is liable for the firm’s actions but is not personally liable.
Two partnership firms cannot enter into a Partnership Agreement, but the partners of those firms can form another partnership. Having said that, a partnership firm can be a member of an association, or it can be a company registered under Section 8 of the Companies Act, 2013.
Registration of Partnership Firm
Registration of a partnership firm is generally optional; however, an unregistered firm cannot enforce a right or a claim arising out of a contract against any third party. And if the firm obtains registration on the date of claim against a third person, the claim can be maintainable.
Registration of a Partnership Firm under Income Tax Act, 1961
Registration of a Partnership Firm under Income Tax Act, 1961, is different from the Registration of Firm under Partnership Act, 1932.
According to the Income Tax Act, 1962, an application for registration of a partnership firm should be made along with a document that specifies the proportion of the profits and losses shared amongst the firm’s partners. This registration must be renewed every year under the Income Tax Act, as per the officer’s orders.
Contents of the Partnership Deed
- Name of business entity and place of business
- Duration of the partnership
- Shares (also known as sharing ratio) of each of the partners in the profits and losses of the business
- The management of the business
- Nature of principal work agreed to be carried upon in the partnership
- Number of partners and the amount of initial capital employed by each of them
- Provision and the manner of raising future capital as and when required
- Details of the distribution of work, if required, may be specified.
- The obligation of partners in the firm, their duties towards partners and the firm
- The management and operating of books of accounts
- Provisions for withdrawal of partners
- Details of the accounting system of the business
- Details of the ownership of the place of business, whether it belongs to any individual partner or the firm jointly
- Provisions for distribution of the goodwill of the business when the situation of dissolution of business arises
- Provisions for distribution of assets and liabilities in case of dissolution
- Provisions for admission of a new partner
- Provision for removal of a partner
- Provisions for an event such as death of a partner, whether his legal heirs will take his place or whether it will be continued by remaining partners
- Provisions for solving disputes amongst the partners should be mentioned. It is advisable to include a clause for arbitration and reconciliation that states that all disputes can be resolved by arbitration.
In addition to the above, if the partners want to include any other terms and conditions, it can be done through the mutual consent of the partners.
Keep in mind that the language used in the partnership deed should be lucid and simple to avoid any confusion between the partners.