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