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A quick guide to partnership firms in India

A partnership firm is a widely used business structure in India where two or more individuals come together to carry out business operations with a shared goal of making a profit.

Partnership firms are governed by the Indian Partnership Act, 1932, and are relatively easier to establish compared to private limited companies or LLPs.

This business structure is preferred due to its simplicity, minimal compliance requirements, and ability to pool resources and expertise.

What are partnership firms in India?

A partnership firm is a type of business entity formed under the Indian Partnership Act, 1932. It consists of two or more individuals who agree to share the profits and losses of the business. The agreement between the partners is known as a Partnership deed, which outlines the rights, responsibilities, profit-sharing ratio, and other key aspects of the partnership. A partnership in India can be formed between:

1. Individuals
2. An individual and a person representing a Hindu Undivided Family (“HUF”)
3. An individual and a partner representing a firm
4. Two partnership firms
5. A partnership firm and a HUF
6. Members of an HUF in their individual and independent capacity
7. An HUF and a member of that HUF independently

Following noted are key features of a partnership firm:

• Minimum and maximum number of partners: A partnership must have at least two partners, and the maximum number of partners is 50 as per the Companies Act, 2013.
• No separate legal entity: Unlike companies, a partnership firm does not have a separate legal identity from its partners.
• Unlimited liability: Partners are personally liable for the debts and obligations of the firm.
• Flexible decision-making: The decision-making process is quicker as there is no requirement for board meetings or shareholder approvals.
• Simple registration process: Registration of a partnership firm is optional but recommended to avoid legal complications.

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How partnership firms are different from other entities?

What are the documents required to open a partnership firm in India?

To register a partnership firm in India, the following documents are required:

1. Partnership deed: This document must be drafted and signed by all partners.
2. PAN card of partners: All partners must provide their PAN cards.
3. Address proof of partners: Aadhar Card, Voter ID, or Passport can be used.
4. Registered office address proof: Rental agreement, property ownership documents, or utility bill.
5. GST registration: If applicable, GST registration must be obtained.
6. Bank account details: A bank account must be opened in the firm's name.
7. Affidavit certifying intent to start the business: Required in some states.
8. Partnership firm registration application (if opting for registration).

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Who can't open a partnership firm in India?

The following entities or individuals cannot form a partnership firm in India:

• Minors: A minor cannot be a partner but can be admitted for profit-sharing.
• Undischarged insolvents: Individuals who have been declared bankrupt cannot be partners.
• Non-Indian citizens (without RBI approval): Foreign nationals must obtain RBI permission before entering into a partnership.
• Entities registered as companies: A company cannot become a partner in a partnership firm.

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What are the tax laws for partnership firms in India?

Partnership firms in India are subject to the following tax laws:

1. Income tax: Partnership firms are taxed at a flat rate of 30% on their total income, plus surcharge and cess as applicable.
2. Tax on partners' income: The share of profit received by partners is exempt from tax in their hands, as it is already taxed at the firm’s level.
3. Deductions for remuneration and interest: Partners' remuneration and interest are deductible subject to Section 40(b) of the Income Tax Act.
4. GST compliance: If turnover exceeds the threshold limit (₹40 lakh for goods and ₹20 lakh for services), GST registration is required.
5. TDS compliance: TDS must be deducted on applicable payments such as rent, professional fees, and salaries.

How to open a partnership firm in India?

The process of registering a partnership firm is as follows:

Step 1: Select a business name

The firm must have a unique name that does not infringe on any trademarks.

Step 2: Draft a partnership deed

The deed should include:

• Name and address of the firm and partners
• Business objectives
• Capital contribution by each partner
• Profit-sharing ratio
• Rights and responsibilities of partners

Step 3: Obtain a PAN card

The firm must apply for a PAN card from the Income Tax Department.

Step 4: Open a bank account

A bank account must be opened in the firm’s name.

Step 5: Register the partnership firm (Optional)

Registration is not mandatory but is recommended. To register submit the relevant forms along with the required documents to the Registrar of Firms of the state where the firm is located. The application should include:

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• Firm name: The official name under which the business will operate.
• Nature of business: A brief description of the type of business the firm engages in.
• Principal place of business: The main location from which the business is conducted.
• Additional business locations: Any other locations where the firm carries out its operations.
• Date of partner admission: The date when each partner joined the firm.
• Partner details: Full names and permanent addresses of all partners.
• Firm’s duration: The intended duration of the firm, whether for a fixed period or indefinitely.

The application must be signed by all partners or their authorized representatives and accompanied by the prescribed fee and a certified copy of the partnership deed.

Upon verification, the Registrar will issue a Certificate of Registration.

Step 6: Obtain GST registration (If required)

If turnover exceeds the prescribed limit, GST registration is mandatory.

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Conclusion

A partnership firm is a simple and cost-effective business structure in India. It offers flexibility but comes with the drawback of unlimited liability. While registration is optional, it is advisable for better legal protection. Proper tax planning and compliance with regulatory requirements can ensure smooth business operations.

Would you like assistance with forming your partnership firm? Let FileAbhi know, and our experts will guide you through the process!

Frequently asked questions (“FAQs”) on Partnership Firms in India

1. Who is the governing authority of partnership firms in India?

Partnership firms in India are governed by the Indian Partnership Act, 1932 and regulated by the Registrar of Firms in respective states. This Act regulates the formation, operation, and dissolution of partnership firms in India. Registrar of Firms regulates functions like registration, maintaining records, amendments and changes, issuing records, dispute resolution etc.

2. Are partnership firms free from tax laws?

No, partnership firms are not free from tax laws. In India, partnership firms are subject to income tax under the Income-tax Act, 1961. A partnership firm is taxed as a separate entity, and its profits are taxed at a flat rate. Additionally, firms are liable for various tax compliances, including tax audits, advance tax payments, and TDS regulations. However, partners are not taxed individually on the firm's profits but are taxed on the remuneration and interest received from the firm, subject to limits prescribed under the Act.

3. How much time does it take to open a partnership firm in India?

The time required to open a partnership firm in India depends on whether it is a registered or unregistered firm. Here’s an estimated timeline:

1. Drafting the partnership deed – 1-2 days
2. Stamp duty and notarization – 1 day
3. Applying for PAN and TAN – 7-10 days (issued by the Income Tax Department)
4. Registration with registrar of firms (if opting for registration) – 7-14 days (varies by state)
5. Opening a bank account – 1-3 days

Total Time Required:

• Unregistered partnership firm – 3-5 days
• Registered partnership firm – 10-20 days (depending on state processing time)

Note: Registration is optional but recommended for legal protection and enforcement of rights under the Indian Partnership Act, 1932.