A Partnership Firm is formed as a result of an association of two or more persons to carry on a business in the capacity of co-owners. Partnership Firms in India are governed by the Indian Partnership Act 1932. Section 4 of the Indian Partnership Act of 1932 defines partnership as “the relation between person who has agreed to share profits of a business carried on by all or any of them acting for all.” All the partners of the firm share the profits and losses in proportion of their respective owners, or as agreed between them. The limitations of sole proprietorship firm gave rise to Partnership firms. Further, in this blog, you shall learn about the compliances involved in Partnership Firms.
Steps involved in Formation of a Partnership Firm
The first step to form a partnership firm is to decide a suitable name for the firm. There are few conditions which should be kept in mind before giving a name to the firm, and those conditions are:
- The name you decide shouldn’t be too similar or identical to an existing firm involved in the same business.
- The second condition is that the name shouldn’t contain words like emperor, crown, empire or any such word that shows the sanction or approval of the government.
Now, once the name is decided, the next step is to form an agreement between the partners. A partnership deed is an agreement between the partners which mentions the rights, duties, profits shares and other obligations of each partner. Although Partnership deed can be written or oral, however, it is wise to write a partnership deed to avoid any future conflicts.
Details Required in a Partnership Deed
Although there is no specific format for drafting a partnership deed, a general deed contains following details and clauses:
- Name and address of the all the partners .
- Date of commencement of business.
- Duration of firm’s existence.
- Capital to be contributed by each partner.
- Profit/loss sharing ratio.
- Salaries payable to partners.
- Duties and obligations of the partners involved.
- The process to be followed on account of retirement or death of a partner or dissolution of the firm.
- Other mutually decided clauses.
Registration Process of Partnership Firm
Although the registration of partnership firm is optional and at the discretion of the partners, however, it is always a wise decision to register the partnership firm so as to enjoy the rights which aren’t available to unregistered firms.
Partnership Firms in India are governed by the Indian Partnership Act, 1932. In order to register a partnership firm, you will have to submit an application form along with the fees to Registrar of Firms of the state in which the firm is situated. The application to be submitted should be duly signed by all the partners or their agents. Thereafter, Partnership deed is created on the stamp paper, which should be signed by all the partners with notarization.
Documents required for the registration process
Following is the list of documents needed to register a Partnership Firm in India:
- Application for registration of partnership (Form 1).
- Specimen of an affidavit.
- Certified original copy of Partnership Deed.
- Ownership documents of the business place if the property is owned.
- In case the property is on rent, rental agreement as a proof of principal place of business.
- Identity proof of all the partners involved which can be either of the documents out of PAN card/ Aadhar Card/ Driving License/ Voter ID/ Passport.
All these documents should be submitted to the registrar who further verifies the documents. If the registrar is satisfied with the documents, he will register the firm in Register of Firms and issue Certificate of registration.
Tax Compliance for partnership Firm
- Once the registration process of the firm is done, it is necessary for the partnership firm to obtain Permanent Account Number (PAN) and Tax Deduction Account Number from the Income Tax Department.
- A Partnership firm needs to file ITR irrespective of the revenue or loss. For partnership firm, the rate of income tax on the whole of the total income will be 30% surcharge on income tax.
- Partnership Firms having an annual turnover of over Rs. 100 lakhs are required to obtain a tax audit.
- GST registration is required for businesses whose annual turnover exceeds Rs 40 lakhs ( Rs 20 lakhs for North Eastern states). For some businesses like Export-Import, E-commerce, and Market Place Aggregator, GST registration is mandatory.
- After GST registration firms have to file monthly, quarterly and annual GST returns.
- Partnership firms are also required to file quarterly TDS returns that have TAN and are required to deduct tax at source as per TDS rules.
- For all the partnership firms having ESI registration, it is mandatory for them to file ESI return.
Documents Required for Annual Compliance of a Partnership Firm
- Invoices of sales and purchase during a financial year.
- Invoices of expenses made during a financial year.
- Bank statements of the bank accounts of the partners.
- Copy of TDS returns filed.
- Copy of GST returns filed.
From the details mentioned above, it is quite evident that Partnership Firms are easy to start, raising funds for these firms is easy, and they have minimal compliance requirements. Apart from the benefits, these firms do have some disadvantages as well as they have limited access to capital; the business has no independent legal status, unlimited liability etc. However, the number of advantages surely outweighs the disadvantages. Since partnership firms have minimal compliance requirements, are easy to set up and come with extra managerial support; therefore, business partnerships will be beneficial for you if you are looking forward to starting a new business.