Why is partnership firm a good option for Start Ups?
Jul 10 2012, 14:30 | By SME Mentor
Undoubtedly there are many advantages of getting into a partnership.
Easy Registration: Since the registration process is rather simple and hardly takes a week, it is the easiest way of setting up a business organisation.
Tax: Its ideal for start-ups since there are much lesser compliance issues; And the tax advantages are many (as there is no double taxation).
Capital: In terms of capital as well, unlike a private limited company, there is access to a larger pool of capital and more managerial capability. However, as a partner you maybe liable for the action of the others as compared to a private limited company where there is limited liability. (for more information refer to story on registration of a pvt ltd)
Making the Agreement: Under the Indian Partnership Act (1932) a partnership is defined as "a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all". The definition however, is silent about sharing the losses. It is merely implied that the losses have to be shared in the proportion that the profits are being shared.
Siddharth Mahajan, founder and partner of Auxilium Partners, a Delhi based legal firm that has assisted many budding entrepreneurs' advises entrepreneurs' to hire the services of a legal expert in drafting the partnership agreement as it requires "careful and meticulous drafting". Mahajan points out that the agreement should not only cover the logistical details about the partners and the firm it should also describe in details the nature of the business, capital that is to be brought in by each of the partners, the ratio in which profits are going to be shared, salaries and commission to be drawn by each of the partners and the method of the valuation of the goodwill of the business.
Stamp Duty: Once the partnership agreement has been drawn up and finalised, stamp duty has to be paid. One can obtain stamp paper of the requisite value and then print the agreement on it. The stamp duty varies from state to state as is applicable under the Stamp Act of the state in question. In order to register a partnership, you will also require certain documents (see box below). The one important aspect to keep in mind is that a partnership is a separate a taxable entity, and unlike a proprietorship, one has to apply for a separate PAN card for the firm. An application for the Pan card for a partnership can be made online at https://tin.tin.nsdl.com/pan/form49A.html.
Income tax is applicable on a partnership firm at a rate of 30 per cent. In addition to this a partnership firm must pay an education cess at the rate of 3 per cent. There is no issue of double taxation as partners are not liable to pay any taxes on the profits that a firm makes. However depending upon the nature of the business, a partnership firm may be liable to pay certain indirect taxes such as service tax or sales tax.
Kruti Desai, Partner ALMT legal and Sneha Patwardhan company secretary ALMT Legal, a Mumbai based legal firm, point out "In case a partnership is unregistered, it may lead to several conflicting situations later. In case of a conflicting situation, a partner cannot sue any other partner, if the firm is unregistered. Further an unregistered firm cannot even sue a third party to enforce any right under a contract." Also, in case of dissolution of a firm, a partner will not have any rights to realise any part of the property. Therefore, for aspiring entrepreneurs' who are willing to begin a business together should ideally get into a formal partnership agreement.
Involving Relatives and Friends into your partnerhship?
A partnership can have a maximum of 20 partners and 10 in case it is a banking firm, but should one consider entering into a partnership with relatives or friends? This is no easy question to answer! Legal experts such as Mahajan point out that the keyword in any partnership is "trust". A partnership with relatives and friends should only be considered if there is a high of level of mutual trust. Also personal and professional boundaries should be clearly chalked out from the very beginning in order to avoid conflicts at a later stage. Needless to say, the vision and goals of the partners in question have to be in sync for the partnership to succeed!
Documentation required for registration of partnership:
a) Duly executed partnership agreement on non judicial stamp paper
b) Address and identity proof of all the partners
c) Passport size photographs of the partners
d) Treasury challan of Rs. 10
e) Address proof of office
f) Lease agreement of the office
g) Duly signed partnership firm registration FORM-1
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