One of the oldest (and time tested) form of business entity is Partnership firms. If two or more people agree to carry on a business they can look at setting up firm rather than private limited company. The maximum number of partners can’t exceed 20 people.
It is easy to start a firm; the registration process is fairly simple compared to registering a private limited company. The registration of firms to be done at Registrar of Firms (ROF) under the provisions of Indian Partnership Act, 1932
The registration process
- As a first step, finalize the name of the firm. Unlike private limited companies, there is no need to get the name approved from registering authorities. However, you can check whether same name is registered under Trade Mark. (your consultant can do this for you) If same or similar name is registered, it is advisable to choose a different name for the firm.
- Apart from the name, you have to finalize the objectives of the firm (you can list them out), name of the partners, place of business, the amount of capital, profit sharing ratio between the partners etc.
- Once you have the above information you can prepare a partnership deed. The deed will contain the clauses such as name of the firm, nature of business, name of the partners, profit sharing ratio, admission, retirement, death of the partner, transfer of shares, rights, powers and duties of the partners, dissolution of the firm etc.
- Registration of the firm: The final deed (to be printed on a stamp paper) to be signed by all the partners and along with the application (Form 1) and requisite fee (fee depends upon the capital of the firm, ranges from Rs.500 to Rs.2000) submit to the Registrar of Firms (ROF)
- Within 10 working days ROF registers your firm and issue Form C as Registration Certificate
The documents required for registration of the firm –
- Application Form No.1
- Partnership Deed
- Rental agreement / address proof of the partnership firm
Income Tax – Applicable at 30% on the Net Profit of the firm.
Service Tax – Payable on quarterly basis; in case of companies ST to be paid on monthly basis
Auditing – if the turnover of the firm crosses One Crore per year, then you have to get the accounts audited as per Income Tax Act provisions by a Chartered Accountant. (Means if the sales are less than One Crore there is no need to get the books audited; however, if you are taking loan from the bank, the banker may insist to get the auditing done)
Liability – The partners will have unlimited liability. This means if the firm has fails to pay taxes, bank loans and dues to the creditors, they can sue the partners personally. The partners will have to bear the loss or the liability of the firm in case the firm defaults. However, even in case of private limited companies, the directors will be held responsible for all tax dues. The banker also takes the personal guarantee of the directors before giving the loan to the company
Non-resident partners – The NRI can invest in the capital of the firm on non-repatriation basis subject to the firm doing business as per FEMA provisions. This topic is discussed separately and you can read an article Can Non Resident Indian (NRI) invest in Partnership firm or a proprietary concern? for more information.
The firm, like any other business entity has to get business registrations like PAN, Service Tax, VAT etc. The details of the same are discussed in separate articles.
FAQ on Partnership firms
How many persons are required to start a partnership firm in India?
There should be a minimum of 2 persons to start a partnership firm in India. Partnership firms in India are governed by the Indian Partnership Act, 1932
How much time and cost is required to set up a partnership firm?
It takes around 10 days to register a partnership firm in India. One can register a firm at a cost of Rs.15000
What is the procedure for setting up a firm?
Starting a partnership firm is fairly simple as compared to LLP or company. The setting up process involves preparation of the partnership deed, filing an application for registration with Registration of Firms and obtaininig registration certificate.
Is there any procedure for obtaining name?
Unlike LLP or company, where the name has to be approved by Registrar of Companies (ROC), there is no requirement for name approval from registering authority. One can choose a name of his choice and get it registered.
Can I register a firm with a name existing already with some other entity?
Though you can register a firm with an existing name, it is not advisable. If a name is registered under Trade mark act, such entities can draw you to a legal battle. So, it is advisable to go with a unique name.
Once the firm is registered, can we change the partners or objective of the firm?
Yes. It is permitted to change the partners (addition/deletion) or objectives of the firm any time after the registration. Reconstitution deed has to be prepared and registered under registrar of firms.
How much tax is to be paid by a partnership firm?
The income tax on profits of a firm is 30.9%. There is no tax on distribution of profits among partners.
Whether salary and profits received by partners is taxable?
Any remuneration or salary received by partners from the partnership firm is taxable in the hands of partners as ‘income from business or profession’. However, any distribution of profits or drawings by the partners is not taxable in the hands of partners.