Partnership Firm

5 Points You Must Know About Partnership

1. Unlimited Liability:

It must be borne into the mind that in the case of a partnership, every partner is individually and jointly liable for the entire liability of the partnership firm.

2. Operation of Bank Accounts :

The operation of a bank account plays a critical role in case of dispute between the partners. So selection of bank operation mode should be made only after careful evaluation.

3. Dispute Resolution:

Every partnership is entered when partners are on harmonious terms. However, a dispute in the case of partnership is not uncommon. So, when entering into the partnership, the dispute resolution mechanism should be written and understood.

4. Interest on Capital:

In case of an unequal capital contribution, the provision of interest should also be considered while entering into a partnership.

5. Stamp Duty:

It is also be kept in mind that proper stamp duty, which varies from state to state, has been paid. Otherwise, in case of any legal dispute, this will work in favour of opponents.

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FAQ`s Regarding Partnership

The partnership at will is a type that continues for an indefinite time depending upon the partners’ will. This partnership can be dissolved at any time if any of the partners decides so.

No, it is not essential to register a partnership firm. However, the registration can be done when forming a partnership or any time after that. The Registrar of Firms in the state where the registered office of the partnership firm is situated does the registration.

When someone represents himself to be a partner of a partnership firm by his conduct or words, but actually he is not a partner, then he becomes a partner for the liability of the firm under this partnership by estoppel law. This provision safeguards the interest of innocent people who may be cheated by the false representation of that person and pay money to the firm.  In such cases, this person becomes liable to repay the money if that firm defaults in payment of money as if he is the partner of that firm.

The maximum number of partners can be 50 in a partnership firm.

Usually, ITR 5 is used for partnership firms. However, it can use ITR4 also if certain conditions are met.

The advantages of a partnership firm are as follows:

1. Ease of Formation
2. Larger Financial resources
3. Combined abilities and judgement
4. Close supervision
5. Flexibility of operations
6. Secrecy
7. Protection of Minority interest
8. Cooperation
9. Scope for expansion

A partnership deed is an important document containing the terms and conditions of a partnership. It is an agreement in writing signed by all the partners. It is not a public document and describes the partners’ rights, duties, responsibilities, and obligations.

The tax rate for a partnership firm is flat, 30%. However, if the net income is more than one crore, there is an additional surcharge of 12%. Other than the above, there is an education cess @4% on tax plus surcharge.

The features of partnership are as follows:

1. Two or more person
2. Agreement
3. Lawful business
4. Sharing of profits
5. Mutual Agency
6. Utmost good faith
7. Unlimited liability
8. Restriction on transfer of interest
9. Joint ownership and control
10. Separate Entity

The disadvantages of a partnership firm are following:

1. Limited Resources
2. Unlimited Liability
3. Uncertain life
4. Conflicts
5. Risk of implied authority
6. restriction on transfer of Interest
7. Reduced Public Confidence
8. Lack of secrecy

The reconstitution of partnership means a change in the partnership deed agreement. It happens for many reasons, such as a change in profit sharing ratio, admission of a partner, the retirement of an old partner, change in partners’ remuneration, etc.

The content of the partnership deed is generally following:

1. Name of the partnership firm
2. The registered address of the firm
3. Nature of business
4. Duration of partnership, if applicable
5. Name and addresses of the partners
6. Capital contribution by partners
7. Profit-sharing ratio
8. Rate of interest on capital, if any
9. Amount of salary or commission to partners
10. Work allocation among the partners
11. Admission and retirement terms and
conditions
12. Dissolution terms and conditions
13. Dispute resolution mechanism
14. Account maintenance and audit procedure
15. Mode of valuation of goodwill, if any
16. System for capital or other withdrawals by
partners

The above list is not exhaustive. It is better to get your deed drafted by an experienced expert.

The partnership deed is required to be imprinted on a Non-Judicial Stamp Paper of requisite value. This value of stamp paper varies from state to state. The stamp-duty act of the state where the firm’s registered office is situated governs the stamp paper value.