A partnership is a relationship between individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all as stated in Section 4 of the Indian Partnership Act, 1932. In simple words, 2 or more individuals can come together to form a partnership and have specific agreement for investing, running and sharing the benefits of the firm. The partners can name the partnership firm based on the business naming guidelines.
The basic principles on which partnership is based are as follows:
Agreement: An Agreement whether expressed or implied is very essential and core to the formation of a partnership. An Agreement between the partners defining roles and responsibilities, profit sharing, rights and obligations is called a Partnership Deed.
Sharing Profits of Business: This rule contemplates existence of business for generation of profits which is then shared between the partners as per the Agreement.
Running the Business: The business can be run by all or any of the partners on behalf of all the other partners. A partner conducting business acts as a Principal and also as an Agent of other Partners. One partner’s actions bind all the other partners. A partnership firm works on the principle of mutual agency.
Who can become a Partner?
Any person who is eligible to get into contractual relationship can become a partner. A minor, lunatic or an insolvent cannot become a partner, however a minor can be admitted only to the benefits of the partnership.
Limitation on Maximum Number of Partners:
Atleast 2 people are required to form a partnership firm. The Act does not provide a maximum limit of partners for the partnership firm, but The Companies Act limits no. of partners to 10 for a banking business and 20 for other business, so the maximum no. of partners can be 20 in a partnership firm.
Registration of Partnership Firm:
Registration of partnership firm is optional and discretionary. A registered partnership firm enjoys special rights vis a vis unregistered firms and therefore it is always advisable to register the firm. The Indian Partnership Act, 1932 governs the partnership firms in India.
Process for registration of partnership firm:
To register a partnership firm, an application has to be made to the Registrar of the Firms in a particular state along with the prescribed fees signed by all the Partners or their agents. The following documents have to be submitted to the Registrar –
- Application for registration of partnership (Form 1)
- Specimen of Affidavit
- Certified original copy of Partnership Deed
- Proof of principal place of business (Lease / Rental documents or ownership documents)
On satisfying himself with scrutiny of the documents, the Registrar will register the firm and issue a Certificate of Registration.
Legal Status & Liability of Partners:
A partnership firm has no distinct legal status separate from it’s partners and therefore the liability of the partners in a firm is unlimited. All of them are jointly as well as individually liable for all the losses and debts of the firm.