Partnership Act
Understanding the Partnership Act in India
The Partnership Act is critical because it defines how a business can be - a Partnership - and any legal framework which outlines the rights, duties and obligations of partners in a business. The length of time the business has been running does not matter - whether new or not, partners should understand the provisions of the Partnership Act in order to be compliant, settle disputes, and trust each other moving forward as partners.
Within this guide, we will discuss the Partnership Act in India, we will summarize some of its provisions, its relevancy today, and how it relates to the Limited Liability Partnership Act.
What is the Partnership Act?
The Partnership Act, or The Indian Partnership Act, 1932, is the main law that governs all issues regarding partnership business in India. The Act then proceeds to state: "A partnership business is the relation which exists between persons carrying on a business in common with a view to profit".
The Act deals with:
Formation of partnership firms
The registration process
Partners' rights and duties
Dissolution procedures
Settlement of disputes
The Act applies to all partnership businesses in India unless a state has specifically amended its application.
Essential Features of the Partnership Act in India
1. Partnership Defined
Partnership Act, in Section 4, defines partnership as the relationship between two or more persons for the sharing of profits and losses. Three characteristics of partnership are mutual agency, a sharing of profits, and that the purpose of the business is lawful.
2. Types of Partnership
The Act recognizes two types:
Partnership at Will – No specified duration to the partnership.
Particular Partnership – The partnership is for a specific purpose and/or duration.
3. Rights and Duties of Partners
Under the Partnership Act in India the partners have rights which include,
Right to be engaged in the business
Right to access business books and records
Right to share in business profits
Right of indemnity from their co-partners.
Similarly, partners' Duties include,
Duty to act honestly and in good faith
Duty to provide true accounts
Duty to not compete with the firm
4. Partnership Deedb>
It is neither compulsory nor mandatory but a written partnership deed is always recommended. The deed should provide the boundaries of operations of the partnership firm, capital contributions of the partners, mechanisms to resolve disputes, and specification of the roles for each partner.
Registration under the Partnership Act in India
Is Registration Compulsory?
Registration is not compulsory under the Partnership Act in India but is encouraged. An unregistered partnership does not have the following capabilities:
Sue fellow partners or third parties
Set-off in any legal proceedings
To register a partnership, the following occurs:
Application to Registrar of Firms
Submission of Form No. 1
Payment of registration fee
Certificate of Registration issued
Therefore, registration improves legal status and facilitators any disputes.
Dissolving a Partnership Firm
Reasons for dissolution:
Voluntary by agreement of the partnerships members
Expiration of the term of the partnership/project
Death or bankruptcy of a partner
Court ordered due to misconduct
The Partnership Act, the law will explain how the assets and liabilities are to be distributed on a dissolution.
Taxation and Compliance
Partnership firms in India are required to obtain the below under the Partnership Act:
PAN (Permanent Account Number)
GST Registration if aggregate turnover exceeds threshold
File their ITR-5 each year
Maintain proper books of accounts
Taxation is done at the firm level, with partners only being taxed on their individual share of profit.
A Comparison of the Partnership Act and the Limited Liability Partnership Act
The Limited Liability Partnership Act which was launched in 2008 provides an alternative form of business structure. Below is a comparison to illustrate the differences:
Features:
Partnership Act
Limited Liability Partnership Act
Legal Personality
Not a legal entity in itself
Is a legal entity in itself
Liability
Unlimited liability
Limited to amount contributed
Minimum Number of PartnersTwo:two
Registration Optional
Mandatory Compliance Burden
Low Moderate
Businesses looking for limited liability and a corporate form structure often favour a LLP under the Limited Liability Partnership Act.
Why the Partnership Act is Still Essential in India
While there are now LLPs and private limited companies, many small and medium companies still prefer traditional partnerships as:
Easier compliance
Fewer legal responsibilities
Informal operation
Lower cost set-up and maintenance
The Partnership Act in India is still important in order to understand how to legally operate this traditional framework and continue to be effective.
Legal Assistance for Partnership Firms
At Vrinlegal, we offer comprehensive legal assistance to partnership firms, including:
Draft and review partnership deeds
Registration of firms under India's Partnership Act
Legal advisory on partner disputes
Conversion of partnerships to limited liability partnerships under the Limited Liability Partnership Act
Tax compliance and tax documents
Our legal advisors will ensure that your partnership fully complies with Indian law and does not face any legal complications going forward.
Conclusion
The Partnership Act is the legal framework upon which India's traditional partnership businesses are built. The new and modern alternatives of LLPs can offer much better liability protection and flexibility , but partnerships are still a preferred model because they are usually simpler and cheaper. The knowledge and factors resulting from complying with the Partnership Act would generally aim to protect the business of the partners so they can continue to operate.
Regardless of whether you are forming a new partnership, dealing with partner disputes, or exploring your options to convert your partnership to an LLP, Vrinlegal can help you with tailored legal solutions under the Partnership Act and the Limited Liability Partnership Act.