All That You Need to Know About Partnership Formation Process

Partnerships are a popular choice amongst entrepreneurs due to the benefits they provide. If you were considering the advantages and disadvantages of a partnerships, this article is for you.

The Indian economy and law provide entrepreneurs with many options when it comes to incorporating a business. Partnerships are one of the most popular choices amongst the business entities available due to the benefits they provide. Partnership registration is an integral process to establish the legal validity of a business partnership. The process of partnership registration occurs whenever two or more parties sign an agreement to run a business together and share the profits and losses it makes. Hence, entrepreneurs need to be wary about the process of partnership online registration. This article will take a look at the partnership formation process.

What Is a Partnership?

A partnership is one type of legal entity formed by two or more parties when they sign a formal agreement regarding their business. This agreement, known as a partnership deed, describes how the team plans on operating the business. Additionally, the parties involved also agree on how they will share the profits made or losses incurred by their business.

Since the partnership formation process is simple and straightforward, small enterprises opt for this structure for their business. Also, partnerships require only minimal regulatory compliances, making them easy to operate and maintain.

All types of partnerships are regulated by the Partnership Act, of 1932. Partnerships can be registered after their formation. The registration of a partnership is not mandatory either. However, unregistered partnerships do not receive several rights and benefits as per Section 69 of the Partnership Act. 

A Partnership Comprises Three Essential Elements

1. Agreement between the parties involved
2. Plan on how to share the profits obtained as a result of the business
3. Business must be run by either all or anyone that represents the rest of the partners

Difference Between a Partnership and a Partnership Firm

Any group of individuals who have entered into any partnership is called partners individually. However, this is merely an abstract relationship that these individuals share collectively. Meanwhile, a firm is a separate legal entity. Hence, while a partnership serves as an invisible bond between partners, a firm is the visible function of that bond in a legally valid capacity.

What Are the Different Types of Partnerships?

There are several methods by which we can differentiate the various types of partnerships in India. One of the most significant parameters used is registration. According to that factor, partnership firms fall into two broad categories:

• Registered partnership firms
• Unregistered partnership firms

As per the Indian Partnership Act, the only criterion to start a partnership deed registration is the execution of the partnership deed between the parties involved. Hence, registration is not mandatory, making it possible for business owners to start operations without registering. However, not registering strips firms of various rights and is not advisable for any business.  

Click here to get started: Partnership Firm Registration

Types of Partners

Active or Actual Partner

Any member who has become a partner through an agreement and actively participates in running the firm. When such partners retire, they must absolve themselves of their responsibilities and liabilities by giving public notice. 

Dormant Partner

Any member who has become a partner through an agreement, but does not actively participate in running the firm. Such partners do not need to give public notice at the time of retirement though they do share the profits and losses incurred by the firm.

Nominal Partner

Any member who merely lends their name to the firm, but has no interest in running the business. They do not share the profits or losses incurred by the firm and have not invested in the firm, but do remain liable for the actions of the firm. 

Partner in Profits

Any member who shares the profits raised by the firm without being liable for its losses. Such members are only liable for the gains received by them from the firm.

Sub-Partner

Any partner who shares their profits with an outsider and holds no right in the firm. Such partners are also not liable for the actions of the firm.

Incoming Partners

Any partner admitted into an existing firm and who is not liable for acts undertaken before their entry.

Outgoing Partners

Any partner leaving the firm while the rest of the partners continue to operate the business. Such partners are liable for acts undertaken until they serve a public notice regarding the same.

Partner by Holding Out

An individual who holds themselves or represents themselves as a partner but is later stopped from doing so. Such partners are liable to anyone who gave credit to the firm as a result of their representation.

Partnership Vs. Limited Liability Partnership

Partnership	Limited Liability Partnership (LLP)
Tend to be less expensive to start and maintain	Tend to be more expensive to start and maintain
Registration occurs as per Section 58 of the Indian Partnership Act	LLPs function through registration under the Ministry of Corporate Affairs
Partners agree to jointly share all profits and losses incurred by the business	A partner is not responsible for the actions of other partners. Partners are also protected from any liabilities incurred by the LLP
Partnership firms must have at least two partners to start and in case this number reduces due to incapacitation or death the firm is dissolved	Requires at least two members, the partners can search for another member if the number falls below the prerequisite without facing dissolution

To convert a partnership firm into an LLP, all the partners must obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN). The partners then have to submit the following documents to complete the process:

1. Duly filled Form 17 
2. Consent from partners
3. Incorporation documents for LLP
4. NOC from concerned tax authorities
5. Financial statements 
6. List of all creditors and their consent
7. Any document requested by the authorities

Benefits of Partnerships 

1. Enables business owners to file suits in a court of law
2. Allows business owners to take legal action against other partners 
3. Makes it possible to enforce various rights and duties as mentioned in the Partnership Act
4. Gain the ability to claim set-off against a third-party in a dispute  
5. The process of partnership online registration is simple, making it easy to start such a business 

Documents Required for Partnership Registration

1. Identity and Address Proof of the Applicants

• PAN card
• Aadhaar card
• Voter ID
• Driving license
• Passport
• Ration card
• Government-issued photo-ID card

2. Proof of Possession of the Business Premises

1. Sale deed
2. Property registration certificate
3. Rent agreement
4. Water, electricity, gas, or telephone bill
5. Property tax receipt 

3. Copy of the partnership agreement

Partnership Formation Process

Here’s a quick look at how Vakilsearch can help simplify the partnership formation process.

1. Entrepreneurs can reach out to us at Vakilsearch and schedule an appointment with our legal experts. Our lawyers will then look into your requirements and brief you on the partnerhsip formation process. 
2. Entrepreneurs may submit their documents online through either our mobile application or website.
3. Once we receive all the required documents, our team will go over them and verify them to prevent issues later. 
4. After successful verification, our lawyers will draft a partnership deed as per your requirement. This deed will then be sent to all the partners for verification and authorization.
5. Once all the partners go through the deed and agree to the conditions mentioned, the deed may be registered with the concerned Registrar of Firms.
6. After successful registration, the entrepreneurs will receive a partnership registration certificate which they may download online as well. Additionally, we also offer services that help newly formed firms open a bank account and apply for PAN.