The Indian Partnership Act 1932 provides provisions related to partnerships in India. The act lays down the rights and duties of the partners amongst themselves and other legal provisions relating to partners and third parties.
Now you may first inquire as to what its partnership is. Section 4 of the Indian partnership Act states that a Partnership is a relationship between individuals who have agreed to share profits of a business carried on by all or any one of them acting for all. The three main essentials of a partnership are as follows –
- A willful agreement between two or more individuals.
- The partners must have agreed upon profit sharing ratio
- The operations of the business must be carried on by all or one of them acting for all.
Essential Elements of a Partnership
- Mutual Agreement – Any partnership is a result of a mutual agreement between two or more parties. This relationship can arise only from a contract. Mutual agreement forms the basis for a partnership. This agreement may be oral or in writing.
- Sharing Profits of the Business – For the purpose of sharing profits in a business, it’s a must that a business exists. It’s another crucial aspect of a partnership. Every Partnership is formed with a profit motive.
Charitable institutions or clubs have a distinct institutional personality from that of a partnership. No partnership to carry on a business can be formed without the motive of gaining profits out of business.
Hence it’s important that an agreement is formed concerning the sharing of profits. This is known as the profit-sharing ratio. Additionally, in the event of damages, unless it is pre-determined in the partnership agreement, it must be borne in the profit-sharing ratio.
- Operating the Business – Another essential of a partnership is that the business must be carried on by all the partners or one partner acting for all. This is an important principle of partnership law.
There is a mutual agency between the partners, and this is also a test for Partnership. The Partnership will be non-existent in the absence of mutual agency.
A Partnership Firm is where two or more persons come together with an agreement to form a business for a profit motive, wherein they decide to mutually share the profits and liabilities of the business. Persons who decide to enter into a partnership with one another are individually referred to as “Partners” and collectively a “Firm.” The name under which the firm carries out its business is known as the firm name.
Advantages of a Partnership Firm
Post knowing and understanding what a Partnership is followed by a Partnership Firm; the following are the advantages of a partnership firm: –
- Easy to Initiate a Partnership Firm – The first advantage of a partnership firm is that it doesn’t require the complex formalities required when a private limited company is being initiated or a limited liability partnership.
It just requires that the partners are in mutual agreement, there is an existing partnership deed on a stamp paper, and it’s good to go for registration. Additionally, registering a partnership firm is not a legal mandate.
- Decision-Making Power – The power to make decisions is an essential aspect of operating a business. With various perspectives and knowledge banks, making a decision in a partnership firm can be quite effective. All the partners can mutually make a decision, or one can make a decision acting for all. This is another advantage of a partnership firm.
- Ease of Dissolution – The next advantage of a partnership firm is that it can be dissolved very easily contrary, unlike a private limited company which can only be closed after an entire year of operations. For that one year, it needs to fulfil all the required compliances. However, the same is not required for a partnership firm.
- Conversion to Private Limited – Further, the next advantage of a partnership firm is that there is no restriction regarding conversion. Once you initiate a partnership firm, it doesn’t mean that it cannot be converted into a private limited company. There are compliances and procedures that must be taken care of for the conversion.
Hence, if a partnership firm begins to grow and is required to expand and diversify, it can be converted into a private limited company.
- No Compliance – At the initiation of the business, it’s hectic and stressful when there are complex compliances to be met with. With a partnership firm, there are minimal to no compliances that are to be seen. This is yet another advantage of the partnership firm.
- Low cost of Setting up – Moving on to the next advantage of the partnership firm, it has a very low cost of setting up. In a private limited company, the compliances are more complex, and the amount involved is higher. This is a very important advantage of a partnership firm.
- Fund Raising – Next advantage of a partnership firm is that, in comparison to a proprietorship firm, partnership firms can easily raise funds. Multiple partners coming together to collectively form a partnership firm means that there are multiple sources of contribution. Additionally, banks have a favourable viewpoint of partnerships during the credit sanctioning procedure.
- Ownership and Accountability – The next advantage of a partnership firm is that despite the partnership firm being owned by several parties, every individual is an owner. They own and manage the firm and its activities. They may have varied roles and responsibilities, but they collectively work towards the common goal of the firm.
Further, the partners share their work burden with one another, which doesn’t lead to any concentrated burden on one individual. The group of people associated by way of partnership work together and diligently.
- Sharing the Risks – Another advantage of a partnership firm is that it becomes easier to share the risks with several partners on board. The burden of allocation of risk gets shared amongst the partners and is not concentrated on one individual.
- No Annual Returns and Statutory Audits – A partnership firm also doesn’t need to make any submission of annual returns to the Ministry of Corporate Affairs. However, the firm is required to fulfil various compliances when a limited liability partnership is formed. This is another major advantage of a partnership firm.
The aforementioned are the advantages of a partnership firm. Another significant advantage of a partnership firm is that there is no requirement for a statutory audit. Hence, the firm is not required to get its accounts audited.
A partnership firm is the easiest to set up; the above-mentioned advantages of a partnership firm are the key points as to why one should set up this form of a business. Though partnership registration is not mandated, it is highly recommended. To know more about the procedure of setting up a partnership firm, get online legal advice.