4 Prominent Benefits of Forming a Partnership Firm

Partnership is one of the most prevalent forms of business organisation in India. The Partnership Act, 1932 governs the functioning of a partnership. Section 4 of the act defines a partnership as “’relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” Though as per the law, partnership firm registration is not necessary but it is advisable to get it registered as it provides various benefits which will be discussed later in this article.

Basic Features of a Partnership Firm

Limit on membership – Minimum two members are required to form a partnership firm. They are called partners. The members should not exceed 10 in case of a banking business and should not be more than 20 in any other business.

Partnership Deed – A partnership deed is a written agreement between all the partners of the firm. It is advisable to draft a comprehensive agreement to avoid disputes in the future. A good partnership deed contains terms with respect to capital contribution, sharing of profits and extent of liabilities, duties and powers of the partners, etc.

Unlimited liability- There exists an unlimited liability in case of partnership. The partners are jointly and severally liable to the firm. But in case of a limited liability partnership, the liability is limited to the stipulated share.

Mutual Agency- This is a very prominent feature of a partnership. The business can either be carried by all of the partners together or alternately any one partner can represent or act on behalf of others. Principle-agent relationship exists in case of a partnership firm.

No Separate Legal Entity- A partnership does not have a separate legal entity which means it is not a juristic person. It cannot sue or be sued in its own name. The partners act on behalf of the firm.

Advantages of a Partnership Firm

Easy to Start – A partnership firm is very easy to start. It does not involve large amount of legal compliances and documentation like other forms of businesses. Only an agreement is required between the partners to commence a partnership firm.

Quick and Better Decision Making– A partnership does not involve conducting proper meetings and passing of resolutions. A partner can act on behalf of other partners in case of urgency. This leads to a quick and better decision making. Since each partner has a mutual role to play, they significantly participate in the functioning of the business. This avoids disputes and hasty decision making.

Better Pool of Resources and Sharing of Risks– Each partner has its own contribution towards the capital of the firm. This leads to a large pool of resources. There is an unlimited liability in case of partnership. This means that the personal assets of the partners can be used to meet the debts of the businesses. But the risk or the liabilities are equally shared among all the members of the partnership.

Cost effective – Formation of a partnership is cost and time effective as it does not involve huge compliance and documentation. A partnership firm can be easily formed with an agreement between different partners.

Is it Mandatory to Register a Partnership Firm?

The simple answer to this question is No. It is not mandatory to register a partnership deed. But in order to avail a few large benefits, it is advisable to get it registered. These benefits include-

Partner cannot sue the firm – A partner of an unregistered firm cannot go for litigation against the partnership firm or his/her fellow partners to enforce his rights. Unless the partner’s name is mentioned in the register of firms, he cannot file a suit against the firm or fellow partners. Imagine, you have invested a huge amount of capital in an unregistered firm and your fellow partners conspire against you and sign an undesirable deal. In order to avoid such an unfavourable situation, it is imperative to register a partnership deed.

Partners cannot sue a third party – Unless a partnership firm is not registered, it cannot sue any third party for any claims arising from a contract. A partner cannot sue on behalf of the firm unless his name appears as a partner in the register of firms.

Cannot Claim a Setoff – Unless a partnership firm is not registered it cannot claim a set off. A claim for set off is a claim for settling of cross debts between the parties. An unregistered deed cannot give you this benefit.

Ease in Conversion of Business – A registered partnership deed eases down the conversion process in the future. It is easy to convert a registered partnership into any other form of business as compared to an unregistered partnership.

It is advisable to draft a comprehensive partnership deed in order to avoid future disputes. An advocate can aid in drafting and registering a partnership deed. It is imperative to get a partnership deed registered in order to be able to exercise your legal rights in the future.

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