PARTNERSHIP FIRM- AN OVERVIEW
“Partnership is the relation between the person who have agreed to share profit of the business carried on by all or any of them acting for all.” The minimum number of person is required to make partnership is two. The Partnership Act does not specify the any limit but the Indian Companies Act 2013, prescribed the maximum number of members in case of partnership firm should not be more than 100. As per companies act 1956, the maximum limit for partnership was 10 and 20 for banking and other businesses respectively.
Partnership form of business organization is created on account of limitation of sole proprietorship such as limited financial resources, limited managerial skill, risk factor etc. The person who constitutes the partnership are called as ‘partners’ and collectively known as a firm and the name under which business is carried on is called the firm’s name. In Partnership form of business organization, the business is set up by an agreement between persons. Persons who are not competent to contract cannot be partners such as minor, lunatics, insolvent etc. There is no compulsion for registration it is optional depend upon partners.
FEATURES OF PARTNERSHIP FIRM
The essential features of partnership firm as stated below –
- EXSISTENCE OF BUSINESS-
Partnership is formed through an agreement between the partners. The partners should do some kind of business. On the other hand, Joint Hindu Family comes into existence by operation of the Hindu Law. Formal agreement is necessary in case Partnership Form of business organization.
- NUMBER OF MEMBERS-
In Partnership form of business organization, there should be minimum 2 persons to form Partnership. One person cannot create partnership. However, maximum number of member may be 20 in case of banking business or 10 in case of general business.
- CONTRACTUAL RELATIONSHIP-
The business is set up by an agreement between persons. Therefore, Partnership establishes a contractual relationship. Thus contract is an agreement enforceable by law.
- PROFIT SHARING-
The purpose of partnership is to earn profit and there must be an agreement for sharing of profit and losses of this business. However, the employees who share profit in the form of bonus cannot be said partners of the firm.
- UNLIMITED LIABILITY-
In partnership form of business organization, each and every partner has unlimited liability for all the debts and obligations of the firm. If the assets of the firm are insufficient to meet the claims of firm’s creditors, the private assets of the partners can be used to pay off the debts.
- LAWFUL BUSINESS-
In partnership form of business organization, an agreement between the partners must be to carry on some lawful business. To carry on illegal activity, an agreement is formed between the partners is null and void.
ADVANTAGES OF PARTNERSHIP FIRM
Following are the advantages of partnership firm as stated below-
- EASY TO INCORPORATE-
The incorporation of partnership firm is quite easy in comparison of other form of business. It required very few legal formalities, therefore its formation is easy. Even initial expenses are not of much consideration.
- QUICK DECISION-
In partnership form of business organization, Decision making is the crux of any organization. Decision making is quite faster in comparison to other forms of organization as there is no concept of passing resolution.
- FLEXIBILITY-
In partnership form of business organization, there is flexibility to change the form of business organization if needed. There are no legal requirements that are to be fulfilled.
- LARGER RESOURCES OF FINANCE-
In partnership form of business organization, Partnership required a large amount of funds. In future, if firm requires more amount of fund then more partners are added by admission of partners entered into agreement.
- REDUCTION IN RISK-
In partnership form of business organization, the risk is shared among all the partners as mention in their agreement. Therefore, the loss share of each partner will be less hence the risk of loss is reduced to minimum.
DISADVANTAGES OF PARTNERSHIP FIRM
Following are the disadvantages of partnership firm as stated below-
- LIMITED RESOURCES-
In partnership form of business organization, funds are limited to the extent of amount contributions made by the partners. There is a ceiling limit of maximum number of partners 10 in case of banking business or 20 in case of other business.
- LACK OF TRUST AND HARMONY-
In partnership form of business organization, if the oral agreement is formed then there is a lack of trust and harmony due to which the decision get delayed which ultimately hamper the business.
- INSTABILITY-
In partnership form of business organization, due to death and insolvency of partner the partnership firm come to end by dissolving the firm.
- UNLIMITED LAIBILITY-
In partnership form of business organization, there is unlimited liability of partners. They bear their liabilities severally, jointly to extent of amount contribution in the agreement. If it is mention in their agreement, that their personal assets liable then partners recover their debts even from the private property of the partners.
FORMATION OF PARTNERSHIP FIRM
A Partnership firm is formed through an agreement which may be oral or in writing. It does not involve any much legal formalities. To avoid misunderstanding and dispute in future it is better to be agreement in writing form. Formation of partnership can be of following points are as follow-
- PARTNERSHIP DEED
- REGISTRATION OF FIRMS
PARTNERSHP DEED-
A written agreement of partnership is known as partnership deed. Partnership deed contains the terms and conditions of partnership and the rights, duties and obligations of partners. It is also familiar with another name known as “Article of Partnership”. It can be altered with the mutual consent of the partners. It should be stamped properly and copy should be given to each partner.
Points to be covered in the partnership deed: –
- Name of the firm and partners along with the address
- Nature of firm’s business
- Amount of capital contributed by each partner
- Profit and Loss sharing ratio
- Loans and advances by each partner
- Amount of withdrawals by each partners i.e. Drawings
- Salary or Commission payable to any partner
- Date of agreement
- Maintenance of Accounts…E.T.C
REGISTRATION OF FIRMS
The Partnership Act ,1932 provides for the registration of firm with the Registrar of firms appointed by the Government. The registration of partnership firm is not mandatory. Unregistered Partnership firm cannot sue to the third parties and cannot resolve in case of dispute among the partners.
STEPS FOR REGISTRATION OF PARTNERSHIP FIRM
The steps for registration of partnership firm are as follow-
- APPLICATION FOR REGISTRATION-
An application form has to be filed to the Registrar of Firms of the State in which the firm is situated along with prescribed fees. The registration application has to be signed and verified by all the partners or their agents.
The application can be sent to the Registrar of Firms through post or by physical delivery, which contains the following details:
The name of the firm.
The principal place of business of the firm.
The location of any other places where the firm carries on business.
The date of joining of each partner.
The names and permanent addresses of all the partners.
The duration of the firm.
- APPROVAL OF PARTNERSHIP FIRM NAME-
Any name can be given to a partnership firm. But certain conditions need to be followed while selecting the name:
The name should not be too similar or identical to an existing firm doing the same business.
The name should not contain words like emperor, crown, empress, empire or any other words which show sanction or approval of the government.
DOCUMENTS FOR REGISTRATION OF PARTNERSHIP
The documents required to be submitted to Registrar for registration of a Partnership Firm are:
- Application for registration of partnership (Form 1)
- Certified original copy of Partnership Deed.
- Specimen of an affidavit certifying all the details mentioned in the partnership deed and documents are correct.
- PAN Card and address proof of the partners.
- Proof of principal place of business of the firm (ownership documents or rental/lease agreement).
If the registrar is satisfied with the documents, he will register the firm in the Register of Firms and issue a Certificate of Registration.
- Register of Firms contains up-to-date information on all firms and can be viewed by anybody upon payment of certain fees.
TIME LIMIT FOR PARTNERSHIP FIRM REGISTRATION
The partnership firm registration process takes maximum 10 days, subject to departmental approval and reply to the respective department.