How Does a Partnership Firm Work?
A partnership firm is formed when a group of individuals decide to form a single business entity. A partnership is formed to share business profits, which may be carried out by all partners or by one partner on behalf of all others. As a result, an agreement is formed between them governing and regulating the partnership. India has a large number of partnership firms.
Learn More About Partnership Firms
Partnership firms are governed by the Indian Partnership Act of 1932. As a result of the Act, the rights and duties of the partners, the firm, and the third parties are governed.
Partnership firms can be described as follows:
- An organization formed by two or more partners
- To achieve the agreed-upon goal
- Business profits are shared collectively.
Partnering in a partnership firm: Eligibility Criteria
It is important to know the criteria for becoming a partner if you wish to establish a partnership firm. According to the Act, the following criteria must be met:
- A person who has reached the age of majority and is of sound mind
- Members of the partnership firm must be competent to enter into a contract or agreement
- Partnering with a partnership firm is possible for Kartas or Hindu Undivided Families (HUFs)
- Public and private limited companies are treated by Indian law as artificial legal persons. Public or private limited companies may become partners in a partnership firm if they are approved by an article of incorporation
- Trustees of religious trusts, family trusts, or other religious endowments can be partners in a partnership firm unless and until prohibited by the constitution.
A partnership firm can become a designated partner in another firm, but do they have to be eligible to do so?
A partnership firm is not recognized as a person by The Partnership Act or any court, so it cannot become a partner of another partnership firm. In contrast, partners of one partnership firm may become partners of another.
A partnership firm can have a maximum and a minimum number of partners
A partner is anyone who has entered into a partnership with another to carry out a business. A partnership firm’s partners act both as agents and as principals.
It is possible for a partner to be bound by the actions of other partners as well as to bind others by his own actions. The Indian Partnership Act does not specify the maximum number of partners for a partnership firm. In line with the Companies Act of 2013, however, no more than 100 partners are allowed.
How Do Partnership Firms Differ?
Partnership firms can be classified into the following types:
- Partnership at Will: There is no agreement, or clause regarding the expiration of the partnership tenure, in this type of partnership. It is therefore possible for any of the partners to dissolve this form of partnership at any time
- Fixed-term Partnership: In such an entity, partners agree on a specific duration. This type of partnership firm has a fixed working term. The partnership ends when the agreed-upon term expires
- Particular Partnership: This type of entity is a partnership formed for a specific purpose. In the agreement, the scope of business is defined. Upon completion of the venture or prescribed activity, the partnership dissolves
- General Partnership: In this type of partnership, there is no particular scope, and the firm is formed to conduct business generally.
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A Few Things to Keep in Mind About Indian Partnership Firms
A partnership firm must have the following fundamental elements:
- An agreement between the partners forms the alliance
- Partnerships can be contractual or voluntary
- In order to form a partnership, at least two people are required
- Partners have responsibilities, duties, and obligations
- Partnership firm’s profit and loss sharing ratio
- Other matters such as capital contributions, withdrawals, and financial reporting
- The profit-sharing ratio requires all partners to bear the loss or damage in the event of loss.
To establish a partnership firm or become a partner in a partnership firm, you must be aware of all eligibility criteria, rules, and regulations.