Partnership Firm in India is governed by The Partnership Act, 1932. Definition of Partnership as per Section 4 of The Partnership Act, 1932 is “Partnership is an agreement between two or more persons who have agreed to profits and losses of the business carried on by all or any one of them acting upon all.” Partnership Firm is one of the most popular types of business in India. Registration of Partnership Firm is easier compared to other business types like Private Limited Company, LLP or One Person Company. However, there are few disadvantages of Partnership Firm and because of that people are converting their Partnership Firms to Private Limited Company or Limited Liability Partnership (LLP).
In this article we will discuss salient features of Partnership Firm and its advantages and disadvantages.
Features of Private Limited
Starting Partnership Firm is relatively easier than starting a Private Limited or Limited Liability Partnership. When two or more persons are desirous of starting a business, they decide the terms and conditions of partnership and reduce the same to writing. Partnerships are covered under The Partnership Act, 1932. The agreement between the partners to start Partnership Firm is called Partnership Deed. Once the Partnership Deed is finalized a Partnership is deemed to have commenced. It is not compulsory to register a Partnership Firm. Even an unregistered Partnership Firm can carry on its business legally. However it is always advisable to register a Partnership Firm. There are some disadvantages of unregistered Partnership Firm, which are:
- Partner of unregistered Partnership Firm cannot file a law suit against Partnership Firm or Partners for enforcement of rights arising out of contract or rights conferred by Partnership Act.
- Unregistered Partnership Firm cannot file any suit against third party for enforcement of rights arising out of a contract.
- Unregistered Partnership Firm cannot claim setoff of amount owed by third party.
An unregistered Partnership Firm can register itself anytime if it was not registered at the time of formation. A Partnership Firm can be registered by filing registration application in prescribed form along with documents such as certified copy Partnership Deed and paying filing fees.
Advantages of Partnership Firm
Partnership Firm is easier to start as compared to Private Limited Company or Limited Liability Partnership. Registration of Partnership Firm is also not compulsory. There are no annual compliances related to The Partnership Act, 1932. Unlike Private Limited Companies and Limited Liability Partnership, annual returns are not required for Partnership Firms. There is no compulsory audit requirement under the Partnership Act, 1932. Audit is only required when there is such requirement under Income Tax Act.
Disadvantages of Partnership Firm
Though Partnership Firm is easier to start and there are almost no annual compliances, it has few disadvantages which should be considered before starting a Partnership Firm.
- A Partnership Firm is not a separate legal entity
- The Partners do not enjoy benefit of limited liability
- All Partners are jointly and severally liable for debts of Partnership Firm. This means that if one partner is not able to pay the dues, it can be recovered from other partners.
- Partnership Firm is not a separate legal entity and thus it does not enjoy benefit of perpetual succession.