PARTNERSHIP FORMATIONS

What is Partnership Firm ?

A partnership firm in India is a business structure where two or more individuals come together to operate a business and share its profits and losses. This form of business organization allows for a flexible management structure and pooling of resources, making it a popular choice for various types of businesses.

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Partnership Formations

Drafting Partneship Deed

Registration Application with ROF

PAN

TAN

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Features of a Partnership Firm

  • ● Shared Responsibility: In a partnership firm, responsibilities, risks, and profits are shared among partners according to the terms set out in the partnership deed. This shared responsibility can enhance business management and decision-making.● Flexibility: Partnerships offer flexibility in terms of management and operational decisions. Partners can tailor the management structure and profit-sharing arrangements to fit their needs through a partnership deed.● Resource Pooling: By combining resources, skills, and expertise, partners can enhance the firm's capabilities and financial strength, potentially leading to better business opportunities.

  • ● Tax Rates: Partnership firms in India are taxed as separate legal entities. They are subject to a flat tax rate of 30% on their total income. Additionally, a 10% tax is levied on income exceeding INR 1 crore under Section 44AB of the Income Tax Act if the firm’s turnover exceeds this limit.● Income Tax Filing: Partnership firms must file their income tax returns annually using Form ITR-5. The firm needs to maintain proper accounts and submit an audit report if its turnover exceeds INR 1 crore.● Tax Deductions and Allowances: Partnership firms can claim various deductions under the Income Tax Act, such as salaries paid to partners, rent, depreciation, and other business expenses. The firm’s profits, after deducting permissible expenses, are taxed at the applicable rate.● Goods and Services Tax (GST): If the partnership firm’s annual turnover exceeds the GST registration threshold (INR 40 lakhs for most states, INR 20 lakhs for special category states), it must register for GST and comply with GST filing requirements.

  • ● Drafting a Partnership Deed: The first step in registering a partnership firm is to draft a partnership deed. This document outlines the rights, duties, and responsibilities of each partner, profit-sharing ratios, and other operational details. It must be signed by all partners and should ideally be prepared by a legal expert.● Obtaining a PAN Card: The partnership firm must apply for a Permanent Account Number (PAN) from the Income Tax Department. This is essential for tax compliance and financial transactions.● Registering the Firm: Though not mandatory, registration of a partnership firm is advisable for legal recognition and to enhance credibility. The registration process involves:● Submission of Application: File the registration application with the Registrar of Firms in your respective state. The application should include the partnership deed, proof of address, and identification documents of all partners.● Payment of Stamp Duty: The partnership deed must be stamped according to the Stamp Act of the respective state. The amount varies by state and is required to make the document legally binding.● Obtaining Other Licenses: Depending on the business type, additional licenses or permits may be required, such as a GST registration, trade license, or industry-specific approvals.● Opening a Bank Account: Open a separate bank account in the firm’s name. The bank will typically require the partnership deed, PAN card, and other registration documents.

  • A partnership firm is a suitable choice for businesses where two or more individuals wish to collaborate, share responsibilities, and pool resources. It offers a flexible management structure and the benefit of shared expertise. However, partners should be aware of the unlimited liability that comes with a partnership, where each partner is jointly and severally liable for the firm’s debts and obligations.
    Before starting a partnership firm, it’s essential to consult with legal and financial professionals to ensure that this business structure aligns with your goals and complies with legal requirements.
    By understanding the fundamentals of a partnership firm, including taxation, registration, and operational aspects, you can make an informed decision and set the stage for a successful business venture in India.

COMPARISONS 

 

Particulars

Sole Proprietorship

Partnership Firm

LLP

OPC (One Person Company)

Private Limited Company

Public Limited Company

Minimum No. of Persons

1

2

2

1

2

7

Minimum Shareholders

1

Not Applicable

Not Applicable

1

2

7

Separate Legal Entity

❌ No

❌ No

✅ Yes

✅ Yes

✅ Yes

✅ Yes

Limited Liability

❌ Owner personally liable

❌ Partners personally liable

✅ Yes

✅ Yes

✅ Yes

✅ Yes

Perpetual Succession

❌ No

❌ No

✅ Yes

✅ Yes

✅ Yes

✅ Yes

Minimum Capital

No Minimum

No Minimum

No Minimum

Rs.1

Rs.1

Rs.5 Lakhs (for listing)

Legal Registration

❌ Not Mandatory

Optional

✅ Mandatory (MCA)

✅ Mandatory (MCA)

✅ Mandatory (MCA)

✅ Mandatory (MCA + SEBI)

Audit Requirement (FY 2025–26)

✅ If Turnover > Rs.1 Cror > Rs.10 Cr if 95%+ digital

✅ Same as Sole Proprietor

✅ If Turnover > Rs.40Lor Capital > Rs.25L

✅ Mandatory (Companies Act)

✅ Mandatory (Companies Act)

✅ Mandatory + SEBI/statutory/cost audit

Income Tax Rate

Individual slab (up to 30%)

Flat 30% + surcharge/cess

22% + cess

22% + cess

22% + cess

25% (< Rs.400 Cr) or 30% + cess

GST Applicability

✅ If turnover > Rs.20L (services) / Rs.40L (goods)

✅ Same

✅ Same

✅ Same

✅ Same

✅ Same

GST Filing

GSTR-1, GSTR-3B etc.

Same as above

Same as above

Same as above

Same as above

Same as above

Compliance Burden

Very Low

Low

Medium

Medium

High

Very High

Raising Public Funds

❌ Not Allowed

❌ Not Allowed

❌ Not Allowed

❌ Not Allowed

❌ Not Allowed

✅ Allowed (IPO, FPO, Bonds)

Transfer of Ownership

❌ Not Easily Transferable

❌ Difficult

✅ Possible

✅ Possible

✅ Possible

✅ Freely Transferable

Best Suited For

Small individual businesses

Family or friend-run firms

Startups, Professionals, Consultants

Solo entrepreneurs with legal structure

Startups, Funded & Growing Companies

Large corporations and public investors

 

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For Your Business Registrations

© Created by Karishma Jain | All rights Reserved

Illustration

For Your Business Registrations

© Created by Karishma Jain | All rights Reserved