What is a Partnership firm? What are its benefits?

A Partnership Firm is one of the most preferred Business structures in India. There are thousands of Small and Medium Businesses that operate as a Partnership Firm, making it important to have a clear understanding of it if you are planning to register your Business.

In this piece, I will try to shed light on various aspects of a Partnership firm. This will help you understand a Partnership registration in a much better way. 

Let’s get going

What is a Partnership firm?

A Partnership firm is a type of Business structure more than one individuals come together to start a business. Here, all the individuals who are called partners agree to offer a certain portion of the necessary resources to run the Business & share the profit as agreed in the Partnership deed. When these individuals come together and form a business structure, it’s known as a “Partnership Firm”.

As per the Companies Act, the minimum number of Partners in any Partnership firm should be two and the maximum cap for the number of Partners is 100.

Benefits of registering your Business as a Partnership firm

  • Easy and simple to incorporate

Although a Partnership Firm can be registered with the Registrar of Companies, it is not mandatory to do so. So if you are planning to start a Partnership firm, you can start your Business rapidly. All you need to is get a Partnership deed ready, and you are good to go!

  • No need for resolutions

Unlike other registered companies, the decision-making process is very fast in a Partnership firm. This is because every Partner holds sufficient authority to make decisions on behalf of the firm. Hence, he/she can take decision instantly without waiting too much on critical issues. 

  • Availability of funds

To start some Businesses, it might be difficult for a single owner to raise the necessary funds. A Partnership firm can prove to be of great help in such conditions as more Partners bring more fund, helping in the business’s incorporation and expansion.

  • More ideas

If a single person is running the Business as a Sole Proprietor, it’s possible that at some point, he/she might get stuck in the face of some problem. If there are multiple Partners, someone from them might have the right solution for the problem, resulting in better performance of the Business. 

  • Accountability and Dedication

In a Partnership firm, every Partner is equally accountable for all the decisions. Any decision can impact the profitability of each Partner. This feeling prompts the Partners to work hard towards their Goal and achieve desired success. 

Drawbacks of a Partnership firm

  • Unlimited Liabilities

This is one of the major Drawback of a Partnership firm. Here, every Partner is equally liable for the liabilities of the firm. So if one Partner takes a wrong decision, or creates any form of liabilities, the others will be equally responsible.

  • No Central Leadership

Lack of Leadership in a Partnership firm can lead to mismanagement in Business Operations. So it’s vital to focus on these issues and take necessary steps to avoid it. 

  • Lack of Trust

People might find it difficult to trust a Partnership firm as no prior registrations are required for a Partnership firm. As there are not much regulations and guidelines for running a Partnership firm, it might make them look less trustworthy. 

  • Dissolution due to Death or insolvency 

A Partnership firm runs on the mutual agreement of all the Partners. So the Death or insolvency of the Partner can lead to the sudden dissolution of the Business, effecting the relevant clients and customers too. 

What are the special features of a Partnership firm?

  • No Registration 

Unlike other Business structures like Companies and LLPs, no specific registration is required to incorporate a Partnership firm.

  • Partnership deed

A Partnership Firm can be incorporated by singing a written document amongst all the Partners. This written agreement is known as a Partnership deed. Partnership deed governs all the Business Operations in a Partnership Firm. The contributions, duties, power and profit-sharing percentage are mentioned in this agreement.

  • Liabilities in a Partnership firm 

Each and every Partner is fully liable for the actions, decisions and steps taken by any Partner/Partners. In case of any debt or outstanding unpaid tax, Partners’ personal assets can be used to pay them off. 

  • Profit/Loss Sharing

The Profit/Loss sharing ratio is decided mutually by all the Partners in a Partnership firm. 

  • Management

Every Partner has an equal right to participate in a partnership firm’s day-to-day business activities. But, there is no compulsion on any Partner to participate in these activities; they can participate in their free-will. But for taking certain decisions, a mutual consensus is necessary. 

  • Transfer of shares by Partner/Partners

No Partner can transfer his/her shares to someone else out of the Partnership deed without other Partner/Partners’ prior consent. But once the consent is received from other Partner/Partners, shares can be transferred easily.

  • The span of a Partnership Firm

Partnership firm and Partnership deed stand void in case if any of the Partner dies, becomes incapable of discharging his/her duties or goes insolvent. 

If the other Partners want to continue the Business under the same name in any of these cases, they can do so by settling all the existing dues of the said Partner/Partners.

 Final Thoughts 

Although Partnership firms can be a great option for the Small and Medium Businesses, multiple aspects should be considered before going in blind. It’s possible that this structure might be suitable for some businesses, but for some, it might not be the case. 

So before making any decision, it’s better to consult a Business consultant that can offer a better solution for your Business.

You can also read about the Registration Process of a Partnership firm here.

If you have any further doubts, you can feel free to ask us any time you want!

Probal Consulting Group is a leading Taxation, Accounting, and Compliance firm that helps individuals, MSMEs, and other businesses manage their accounting, taxation regulatory compliance affordably.

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