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What is a 'Partnership'?

A Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

What is a partner, and what is firm and firm name?

Persons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which their business is carried on is called the firm name.

Is it compulsory to register partnership firm?

Not necessarily. However, unless a partnership firm is registered with the registrar of firms and societies,

a) It will not be possible to sue one partner against another partner or against the firm and vice versa in the court of law to claim right.

b) Partnership firm cannot sue third party in the court of law for enforcement of it's right

Is there a limit on the number of partners in a partnership firm?

Yes.  There must be minimum of 2 persons to form a partnership firm. If the firm is intended for financial transactions maximum of 10 and for other purposes maximum of 20 persons can form a firm.If the number of partners is more than 20, it has to be registered as a company.

How do you value a partnership where one partner retires?

This should have been stated in the original partnership agreement but the valuation will be a combination of goodwill, premises value, fixtures and fittings and all other assets minus all liabilities except the partner's capital. The best advice is to use the services of a competent professional.

Can a partner be expelled from the partnership? If so, under what circumstances and to what effect?

A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the partners. The provisions of sub-sections (2), (3) and (4) of section 32 of the Indian Partnership Act, 1932 shall apply to an expelled partner as if he were a retired partner.

How a new partner or partners can be introduced in a firm?

Subject to contract between the partners and to the provisions of section 30 of the Indian Partnership Act, 1932, no person shall be introduced as a partner into a firm without the consent of all the existing partners. Subject to the provisions of section 30 of the Indian Partnership Act, 1932, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner.

Can a minor be admitted as a partner?

A minors can be admitted to the benefits of partnership with the consent of all the partners for the time being.

The Minor (who is admitted to benefit of partnership) has a right to such share of the property and of the profits of the firm as may be agreed upon and he may have access to and inspect and copy any of the accounts of the firm. Such minor´s share is liable for the acts of the firm, but the minor is not personally liable for any such act.

What is the disadvantage of partnership?

The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by the firm or any partner on behalf of the firm. If property of partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm.

Is Partnership Firm is a legal entity?

A Partnership Firm is not a legal entity. It has limited identity for purpose of tax law. As per section 4 of Indian Partnership Act, 1932, 'partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. Under partnership law, a partnership firm is not a legal entity, but only consists of individual partners for the time being. It is not a distinct legal entity apart from the partners constituting it.

What is a partnership at will?

When the partnership deed does not contain any provision for the duration of the partnership nor conditions for the termination of partnership, it is a partnership at will.

Does the death of a partner dissolve the partnership firm?

Yes. The death of a partner automatically dissolves the partnership firm. It is however usual for the partnership deed to provide before hand that the firm should continue in spite of death, retirement or insolvency of a partner.

 Is the firm liable for the wrongful act of one partner?

 Yes. The firm and all the partners are liable for the wrongful act or fraud which causes loss or injury to any third parties.

Registration of Partnership Firm

Registration of Partnership firm under Indian Partnership Act, 1932

All the District Registrars are Registrars of firms under the Indian Partnership Act, 1932. Registration of firms can be done with the District Registrars concerned. In the application for registration, the signature of each partner shall be attested by an Advocate or Chartered Accountant.

The name of the firm shall not be objectionable.

A firm can be registered by filing a statement in Form-I. Any change in the constitution of the firm should also be filed under this Act. The Registrar files the statement after making necessary entries in the Register of Firms.

Taxation of Partnerships

Partnership firm is subjected to taxation under the Income Tax Act,1961. Under the Income Tax Act, the Partnership firm is taxed as a separate entity, distinct from the partners. In the Act, there is no distinction between assessment of a registered and unregistered firms. However, the partnership must be evidenced by a partnership deed.

The partnership deed is a blue print of the rights and liabilities of partners as to their capital, profit sharing ratio, drawings, interest on capital, commission, salary, etc, terms and conditions as to working, functioning and dissolution of the partnership business.

Under the Act, a partnership firm may be assessed either as a partnership firm or as an association of persons(AOP). If the firm satisfies the following conditions, it will be assessed as a partnership firm, otherwise it will be assessed as an AOP:-

The firm is evidenced by an instrument i.e. there is a written partnership deed.

The individual shares of the partners are very clearly specified in the deed.

A certified copy of partnership deed must accompany the return of income of the firm of the previous year in which the partnership was formed.

If during a previous year, a change takes place in the constitution of the firm or in the profit sharing ratio of the partners, a certified copy of the revised partnership deed shall be submitted along with the return of income of the previous years in question.

There should not be any failure on the part of the firm while attending to notices given by the Income Tax Officer for completion of the assessment of the firm.
 
It is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership firm can claim the following additional deductions which the AOP cannot claim :-

Interest paid to partners, provided such interest is authorised by the partnership deed.

Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual. The remuneration paid to such a partner must be authorised by the partnership deed and the amount of remuneration must not exceed the given limits.