When one decides to be an entrepreneur and enter the world of doing business, it is important to decide on the legal structure of the business for its registration. The Regulations of India allow several forms of entities for running a business, in which the structure can be a Partnership, LLP, Proprietor, Private Limited Company or a Public Limited Company. The commonly found types among the multiple member business include companies, LLP and partnership. There are certain factors to consider while choosing the type of business which includes – Ownership, Taxes and Liabilities.
According to the Indian Partnership Act, 1932 Partnership is the relation between two or more persons who agreed to share the profits of a business carried by all of them or any one, on behalf of all of the partners.
General partners and Limited partners are the two major types of partnership. General partners are the ones who bear the liability for any debts in the partnership while Limited partners are the ones that invest and do not share total liability or participate in the day-to-day operations of the business. The members, who run the partnership business, are called “Partners” individually and collectively they are called as the “Firm”.
In proprietorship form of business there are certain limitations, be it resources or skills. For instance, if one person might have capital but lack of skills, while the other might have skill and lack of capital then they can come together to form and run a business which is a Partnership.
TYPES OF PARTNERSHIP FIRM
Diving into the major types of partnership is as listed below
- General Partnership
- Limited Liability Partnership
- Based on registration
In this type of Partnership, each partner has equal share in profits and loss, unless and otherwise agreed. On the cons part, the partners’ liability is unlimited in case of loss by the actions of one partner.
- Partnership at will – The partners decide until when the partnership would exist
- Particular Partnerships – This is when the partnership is created on a specific undertaking
Limited Liability Partnership:
This form is governed under Limited Liability Partnership Act, 2008. In a Limited Liability Partnership, unlike General Partnership, the partners will not be held liable personally for the actions done by the other partner(s) or business debts. The partner cannot lose his personal assets to pay back the debts of the business.
Registration based Partnership:
The Indian Partnership Act, 1932 does not mandate the partnership firms to register. So, both these forms of partnerships are recognised by the Law.
- Registered Partnership – This Partnership that is registered under the Indian Partnership Act, by the register is considered as the Registered Partnership. Here the Registration fee must be paid to the Registrar of form.
- Unregistered Partnership – This type of Partnership is established based on the agreement between the partners. However, it is always advisable for the firm to be registered
IMPORTANCE OF PARTNERSHIP FIRM
- Decision making: The decision-making process in the partnership firm and day to day activities are shared among the partners as mentioned in the agreement and the decisions will be on mutual consent and each partner gets the right to make the decisions.
- Dissolution or Continuity: If any partner is retired, dead or due to insanity, if the partner lacks in continuity, then the partnership agreement comes to an end. If the partners want to continue with the firm they have the option to form a new partnership agreement.
- Risk: The profits are shared among the partners based on the ratio decided by them in the agreement and for the losses, they are shared equally among the partners.
- Wide range of Expertise: Partnering with the individuals with expertise in different parts, helps in the growth of the firm.
- Resources: In partnership firm the partners will be experts in various parts and forms a partnership. So, there are more possibilities for more resources compared to any other forms of business.
- Raising funds: In sole proprietor form of business the biggest disadvantage is rising funds but in this type of partnership, it is not the same issue as there will be multiple partners. Also, it is comparatively easier, to get the loans sanctioned from the banks.
ADVANTAGES OF PARTNERSHIP OVER A COMPANY
- In the partnership firm, the decisions to be regulated is in the hands of some partners while in the company, it involves a lot of Legal format.
- In case of dissolving the partnership, the agreement between the partners is sufficient but, in a company, it involves a lot more procedural steps.
- Number of formalities and procedures must be followed to form a company, wherein it is sufficient for the individual to sign a collaboration agreement and form the Partnership firm.
- The risk is shared equally among the partners, so the burden is potentially lower for each individual partner in the firm.
- In the partnership firm, the agreement can be dissolved on the agreement of the partners or on the death of one partner, but in the company the individual might come and go, but the company is not affected.
- When it comes to decision making process, it is quite easy in a Partnership firm, but in the company, it is necessary for the Board of Shareholders to approve.
- In Partnership firm, there is flexibility in operation and nature and the operation of business can be changed, but in a company, it takes lot of legal procedures.
- The major factor are taxes, where in a Partnership firm, the profit of the partners is not taxable but, in a company, the remuneration received by the director can be taxed.
- The companies are managed in regulations with various organizations like SEBI, RBI etc. but in a Partnership firm, it is governed by the agreement between the partners.
Every form of business has its own disadvantages but when it comes to partnership the advantages over-weigh the disadvantages. The partnership firm has different partners & consists of expertise in different kinds of activities which in turn, helps in getting the objectives accomplished. However, it also depends on the factors such as ownership, tax & liabilities.
Author(s) Name: Srija Purimetla (IFIM Law School, Bangalore)