A partnership is a special type of contract and is a relation between two or more persons who have agreed to share profits of a business run by all or any one of them acting for all. The essence of a partnership is a contract between partners. It is mandatory for partners to share profits among themselves.
A partnership is one of the oldest business structures in India and is governed by the Indian Partnership Act, 1932. A partnership firm does not have an independent status apart from the partners constituting it. A partnership is not a legal entity; it has a limited identity for the purpose of tax laws. Any two people who are capable of entering into a contract can start a partnership business under an agreement called a partnership deed. The partnership agreement can be oral or written. It is not mandatory to register a partnership deed, but it is advisable to do so for evidential purposes since a firm cannot file a suit against a third party if it is unregistered.
Forming a partnership firm is simple since it does not have to be registered to start operations. A partner is an agent of the firm and all other partners. Each partner is liable for the actions of the other partners.
Benefits of Partnership
- Easy to form: Since a partnership is a relation of two or more people, its formation is very simple. It can be created by an agreement among the partners describing terms and conditions.
- Registration: As per the law, registration is not mandatory to start a partnership. However, registration is advisable for evidence if any dispute arises in future.
- Flexibility: Easy to manage as there are no compliance requirements compared to a company or LLP form of business structure.
- Sharing of responsibilities: Partners can share the responsibility of partnership and the business. They can also share the decision making responsibility.
- Tax: Compared to company, tax on profit is less in a partnership. Also, no profit distribution tax is applicable to a partnership firm.
- Winding up: Easy to wind up a partnership firm than a company or LLP as partnership is created by an agreement.