A partnership is a venture undertaken jointly by multiple parties which can be governments, businesses, private individuals or enterprises. The partnership can be categorised as:
General Partnership - All the parties, share legal and financial liabilities as per the ratio decided mutually. They also share profit in the same way that is in the ratio decided and written in the partnership deed.
Limited Partnership - Limited Partnership is the hybrid of both general and limited liability partnerships. In the limited partnership, there must be a partner who is a general partner and takes the full liability of the debts of the partnership. Whereas, there should be a silent partner whose liabilities are limited to the amount he has invested. Usually, a silent partner does not get involved in the management or regular operations of the partnership.
Limited Liability Partnership - It is a common partnership structure for professionals like lawyers, architects, etc. In this type of partnership, the personal liabilities of partners are limited. For example, the wrong practice of one partner does not affect the assets of other partners.
It is always better to include an expulsion clause in the partnership agreement, which should mention the details about the events that can be the grounds for expelling a partner.
Partners are free to choose any name for their partnership firm by keeping the following rules in mind:
The name of the firm should not be identical or similar to the already existing firm having a similar business. Similar names can damage the earned reputation of the original firm.
The name should not include the words such as Crown, Empire, Empress, Emperor or words that express or imply sanction, approval or patronage of the government unless the State government signifies its consent in writing for using it.
A partnership deed or partnership agreement is a record which is drafted in detail about responsibilities, rights and functionalities of all parties involved in the business operations. It is a legal document designed to guide partners while conducting the business.
A partnership agreement may be either oral or written format. However, the agreement in oral format does not have any value for tax purposes. Therefore, it should be prepared in a written format.
The following information is required for the Partnership Agreement:
Name and address of the firm
Names and addresses of all partners
Business capital contribution starting date by each partner
Nature of business
Capital contribution by each partner
Profit and loss sharing ratio of partners
Apart from the above information, certain specific information is also required in the clauses of an agreement to avoid any conflict in the future:
Interest on partner's capital, partner's loan or any other interest to be charged on drawings
Salaries, commissions, or any other amount payable to partners
Duties and obligations for all partners
Rules to be followed in case of retirement or death of partner or dissolution of a firm
Method of preparing accounts and audit arrangement
The Indian Partnership Act, 1932, governs partnerships in India. The registration of the partnership agreement is not mandatory according to the Act. It is the partner’s decision whether they want to register their partnership firm or not. However, the registration of the partnership helps to avoid the conflicts which may arise in the future. Also, they may enjoy the benefits of a registered partnership firm.
The registration can be done before starting the business or anytime during the continuation of the partnership. However, the registration should be done before filing the case in the court to enforce rights arising from the contract. In India, the procedure for registering a partnership firm is quite simple. An application with required documents and prescribed fees need to be submitted to the Registrar of Firm of the state.
All partners or their agents must sign an application of registration. The registrar goes through all the points and clauses written in the agreement. On satisfaction with all the points, he then adds the entry in the register called the Register of Firms and issues the Certificate of Registration.
The Register of the Firms is updated with the up-to-date information about each firm, maintained at the registrar office. A register is open to inspect with the prescribed fees.
The registration of a firm is different from the registration at the Income Tax Department. For business, it is mandatory to register the firm with the income tax department and have a PAN Card. Once both the registrations are completed and PAN Card is received, the firm then requires to apply for the current account in the bank in the name of the Partnership Firm. Then all the transactions can operate through this account.
The documents required for the registration of a Partnership Firm are:
Registration of Partnership application in Form No. 1
Duly filled specimen of Affidavit
Partnership Deed certified true copy
Business place ownership proof or rental/lease agreement
Steps to follow while registering the LLP are:
Obtain Digital Signature Certificate (DSC) - All the documents file online for LLP; therefore, it should be signed digitally. Hence, DSC is the initial requirement before initiating the process of registration as LLP. It can be obtained from government recognized certifying agencies.
Apply for Director Identification Number (DIN) - The DIN for all the partners are required for the LLP registration. Along with a copy of documents, such as Aadhaar and PAN, an application for allotment of DIN should be made in Form DIR-3.
Name Approval - Limited Liability Partnership - The Reserve Unique Name (LLP-RUN) also requires filing to reserve the name for LLP. Though before putting any name on the form, one should check on MCA portal, whether the name is unique or not. The registrar approves the name only if it is not undesirable as in the concern of the Central Government and it should not already exist.
Incorporation of LLP - An integrated form named as "Form for incorporation of Limited Liability Partnership" (FiLLiP) should be filed accompanying prescribed fees with the registrar. If not applied before, an applicant can apply for DIN and Name Reservation in the FiLLiP form. Once the reserved name gets approved, it gets filled as the proposed name of the LLP.
File LLP Agreement - The LLP agreement should be filed in form 3 on MCA portal online within 30 days of the date of incorporation. It should be printed on stamp paper.
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