When two or more people come together and pool funds to start a business, it’s known as a partnership firm. The primary aim of partnership firms is to earn profit.
Partnership firms in the country are bound by the laws defined under the Indian Partnership Act, 1932.
According to Section 4 of the Partnership Act, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
People who enter into partnership with one another to start a business are individually called “partners” and are collectively a “firm”. The name they give to their business to carry on operations is called the “firm name”, according to the Indian Partnership Act.
This article will help people who are looking to start a partnership firm and want to learn how to go about it. Let’s start by learning how many types of partnership firms are there and how they are different from each other.
Types of partnership firms
- Partnership at will
At the time of forming a partnership firm, all the partners mutually agree on the tenure of the partnership. If they wish, they can also extend the tenure when the date of closure approaches. But all of this has to be decided beforehand.
When a partnership firm is created without deciding any specific time limit of its partnership, it is called partnership at will.
In a “partnership at will”, individual partners can mutually decide at a later date when to dissolve the partnership if the need arises. In such a partnership, the profit earned by the firm is considered as individual partners’ income.
Each partner pays tax on such an income and they are all responsible to clear the company’s debts.
- Particular partnership
According to the Indian Partnership Act, a “particular partnership” is formed when the partners mutually decide on a specific date to end the partnership. Instead of a date, they can also decide to dissolve the partnership when the specific objective of the partnership is achieved.
A particular partnership firm is temporary in nature and is usually created to carry out a project.
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However, the partners are free to extend the dissolution date of the partnership. Examples of such a partnership are making a feature film, working on a government project, etc.
In a particular partnership, liabilities of the company have to be borne by individual partners. They might have to dip into their personal assets and savings to clear the company’s debts.
- Limited Liability Partnership
A firm formed as a Limited Liability Partnership (LLP) is governed by the Limited Liability Partnership Act, 2008.
Unlike the earlier two types of partnership, LLP works as a corporate organisation. In an LLP, partners have limited liability, which is determined by their investment in the company.
Partners in an LLP are not legally bound to put their personal assets at stake to clear the company’s debts.
What are the different types of partners
While forming a partnership, different types of partners come together and bring a varied number of skills and experiences to the table.
Based on their role and how they want to be associated with the partnership firm, they can be characterised into eight different types.
| Type of partner | Role |
| Active partner | An active partner is involved in the day-to-day business operations |
| Dormant partner | A dormant partner is not involved in the day-to-day operations |
| Nominal partner | Such a partner neither invests money nor takes active participation in the business. Nominal partners are simply the face of the company to add goodwill to the firm. |
| Partner by estoppel (holding out) | When a person either verbally or in written form tells a client he/she is a partner and receives credit or some other favour, he/she will be legally considered as a partner by estoppel. |
| Sub-partner | When a partner shares his/her profit with a person outside the firm, the latter becomes a sub-partner. |
| Minor partner | A partner who is less than 18 years of age is called a minor partner. He or she can not file any legal suit against other partners. |
| Partner in profit only | Partner in profit becomes a partner with the agreement of all partners that he/she will not be liable to losses of the firm. |
| Secret partner | A secret partner invests money in the business and has a say in the day-to-day operations. However, he/she keeps their identity a secret and doesn’t want anyone to know of their association with the firm. |
Features of a partnership firm
A firm is considered a partnership firm if it fulfils certain conditions as defined in the Indian Partnership Act.
- Contract or agreement
The first and foremost requirement of a partnership firm is that there must be a contract or an agreement among the partners to start a partnership company. This contract among the partners is what distinguishes such a firm from a family business.
In the event of the death of one of the partners, their next of kin doesn’t automatically become a partner, unless stipulated in the contract.
- For-profit business
Earning a profit must be the core objective of running a partnership firm. A partnership firm should have products or services that can reap profits for the partners.
If two or more people start a non-profit organisation, it will not be considered a partnership firm.
Moreover, the profits earned by a partnership firm should be shared among the partners as determined by the contract.
- Business operation
Every partner in a partnership firm has the right to carry out business decisions for the benefit of the company as well as for individual partners. The Partnership Act says a mutual agency among the partners is necessary, empowering every partner to make decisions for himself and on behalf of others.
What are the contents of a partnership deed?
While it’s not mandatory for partners to write a partnership deed for creating a partnership firm, it’s better to have one for legal purposes.
A partnership deed is a legal document that has all the terms and conditions related to the business, relationship among partners, responsibilities, profit sharing ratio, etc.
These are a few benefits of forming a partnership deed:
- Safeguards legal rights of every partner
- Outlines profit or loss ratio among the partners
- Helps in getting PAN in the name of the company
- GST registration of the firm becomes easier
- Can apply for an FSSAI licence in the company’s name
Although a partnership deed doesn’t have any specific format, there are a few elements that one should include while writing it:
- Basic details: This part includes information like the names of the partners, and their personal information such as addresses, phone numbers, etc. It should also mention the type of partnership and what kind of business they are going to run.
- Longevity of the partnership: All the partners are advised to decide how long they want to carry out the partnership and mention those details in the partnership deed. If it’s not mentioned in the deed, it will become a partnership at will.
- Place of business: The specific location of the business from where all the operations would be conducted should be mentioned.
- Bringing new partners: All the partners should be on the same page regarding the rules for bringing a new partner, his or her role in the company, and conditions for bringing a new partner such as their salary and liabilities, etc.
- Roles and responsibilities: It is important to lay down the responsibilities of each partner in the firm so that there is no confusion later on.
- Capital infusion: The deed should mention how much capital each partner will invest in the company. This should not be limited to only money, but also mention if a partner is providing personal office space or any other asset that can be used for running the business.
- Profit sharing: Details of how the profit will be shared among the partners form an important element of the partnership deed.
- Taking loans: The partnership deed should have proper guidelines for taking a loan from a bank or any other financial institution. The rules should be explicit about the liabilities of each partner.
- Leaving the firm: This includes the terms and conditions for voluntarily leaving the partnership firm. This should mention details such as the notice time, partner’s liabilities after leaving the firm, re-arrangement of profit-share after leaving the firm, etc.
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Frequently Asked Questions
What is the limit of partners in a partnership firm?
A minimum of 2 and a maximum of 20 people can form a partnership firm.
Is it important to register a partnership firm?
It is legally not required to register a partnership firm. However, it’s better to register the company as a partnership firm to enforce the rights of the partners in court, if needed.
Can one make a deal with one of the partners of the firm without speaking with other partners?
Yes, the Indian Partnership Act says that each partner can take action on behalf of other partners and the firm. Any such decision taken by a partner binds all the partners to his or her actions. The firm and the partners are liable for the wrongdoings such as the fraudulent actions of one partner.
What happens in the case of the death of a partner?
The partnership firm automatically dissolves if a partner dies.
