Partnership Firm
Partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. The owners of a partnership business are individually known as the "partners" and collectively as a "firm". The main features of a partnership firm are:
- A partnership is easy to form as no cumbersome legal formalities are involved. Its registration is optional. However, if the firm is not registered, it will be deprived of certain legal benefits including being entitled to sue another.
- A partnership firm is registered with The Registrar of Firms
- The minimum number of partners must be two, while the maximum number can be 10 in case of banking business and 20 in all other types of business.
- The firm has no separate legal existence of its own i.e., the firm and the partners are one and the same in the eyes of law.
- In the absence of any agreement to the contrary, all partners have a right to participate in the activities of the business.
- Ownership of property usually carries with it the right of management. Every partner, therefore, has a right to share in the management of the business firm.
- Liability of the partners is unlimited. Legally, the partners are said to be jointly and severally liable for the liabilities of the firm. This means that if the assets and property of the firm is insufficient to meet the debts of the firm, the creditors can recover their loans from the personal property of the individual partners.
- Restrictions are there on the transfer of interest i.e. none of the partners can transfer his interest in the firm to any person (except to the existing partners) without the unanimous consent of all other partners.
- The firm has a limited span of life i.e. legally, the firm must be dissolved on the retirement, lunacy, bankruptcy, or death of any partner.
- A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as "Partnership Deed". Ordinarily, the rights, duties and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of the Indian Partnership Act, 1932 will apply.
• Advantages
- Ease of formation
- Greater capital and credit resources
- Better judgement & more managerial abilities
• Disadvantages
- Absence of ultimate authority
- Liability for the actions of other partners
- Limited life
- Unlimited liability
Taxation
A Partnership Firm though not a separate legal entity in the eyes of law, is regarded as a separate person under the Income Tax Act, 1961 and is taxed at the maximum marginal rate.
Conversion of a partnership firm into a Company
Consequent to the growth in business, a need often arises to dilute the ownership, bring in distinction between operational control and ownership control and facilitate or contribute a feeling that working for organization is bigger than working for a individual. Corporatization also brings with it advantages such as Limited Liability, Perpetual Succession, Transferability of shares, Expansion etc. Conversion of a proprietorship firm to a company shall be done under the provisions of the Companies Act, 2013 and the Income Tax Act, 1961. The options available are:
- To dissolve the firm and incorporate a new company under the Companies Act, 2013; or
- Incorporate a company which can legally take over the business of the firm and continue the same business