There are various business structures such as Sole Proprietorship, One Person Company, General Partnership, Limited Liability Partnership, Private Limited Company, and Public Limited Company, that an entrepreneur can choose to start a business. Choosing an ideal legal structure would be one of the first decisions an entrepreneur would make. But how to decide which business entity is ideal for your business? 

In this article, we will discuss General Partnership.

A General Partnership is an association of two or more individuals who agree to share the profits of a lawful business that is managed and carried on either by all or by anyone of them, or some of them acting for all. 

In other words, it is a kind of organisation where a formal agreement between two or more people is made who agree to: 

1. Become the co-owners; 
2. Distribute responsibilities for running an organization and 
3. Share the income or losses that the business generates or incurs.

Number of Partners

In a partnership firm, a minimum of two persons is required and a maximum of 50 persons can start a partnership business. 

Profit-Sharing

In a partnership, the profits and losses are shared among the partners as agreed by them in the partnership agreement.  However, in absence of an agreement, profits and losses are shared equally by all the partners. 

Ownership and Control

The partners of the firm have ownership and control in the firm as agreed by them in the partnership agreement. In the absence of an agreement, it is equal. The partnership firm is not required to file its financial statements to the Government authorities enabling it to maintain financial confidentiality within the firm. 

Capital

The partners of the firm make initial capital contributions as agreed while forming the partnership. They can make additional contributions depending upon the need and operation of the partnership as decided in the agreement. Capital contributions by partners may include cash contributions and other asset contributions. 

Liability 

Every partner of the firm has unlimited liability i.e. in case of loss, personal assets of the partners can also be used to pay liabilities of the firm. All the partners are liable jointly and severally for the debts and obligations of the firm. A partnership firm is just a name for the business as a whole. The firm means partners and the partners mean the firm. The law does not recognize the partnership firm as a separate entity distinct from its partners.

Legal Formalities

The formation and set-up of a partnership firm is relatively quick. There is no mandatory requirement to be registered. Similar to sole proprietorship, it may require obtaining certain licenses or permissions from the local administration depending on the nature of the business. The partnership firm is governed by the partnership agreement that is signed by all the partners. However, in the absence of an agreement, the partnership is governed by the Partnership Act, 1932. 

Relation Between Partners

The relationship between the partners of a partnership firm is contractual in nature. Every partner is an agent of other partners when acting on behalf of others. Thus, the relationship between partners is that of a principal agent. 

Registration of General Partnership

Partnership form of business does not require mandatory registration. However, registration of partnership attracts several benefits such as any partner can file a case against other partners, a firm can file a suit against outsiders in case of disputes, claims, disagreements, etc. 

Restrictions on Becoming a Partner

The following persons are not eligible to become partners in a firm:

1. Minors
2. Lunatics
3. Insolvent persons

Advantages and Disadvantages of General Partnership

Advantages

1. Relatively Quick Formation

2. Large Capital

3. Better Manageability

4. Advantages of Confidentiality

5. Benefit of Unison

6. Profit Incentive

7. Equal Ownership 

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Disadvantages

1. Lack of Longevity of Partnership Firm

2. Unlimited Liability of Partners

3. High Chance of Disputes 

4. Divided Authority

5. Lack of Public Credibility

6. Not Investor-Friendly

7. Difficult to Change Partnership Pattern

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Suitability of General Partnership

Partnership form of business organisation is suitable for comparatively small businesses such as retail and wholesale trade, professional services, medium-sized mercantile houses, and small manufacturing units. As a common practice, many organizations are initially started as partnership firms, and later when it is economically viable and financially attractive for the investors, they are converted into a company. 

Is Registration of a Partnership Firm Mandatory? 

It is not mandatory to register a partnership firm as per the Partnership Act, 1932. However, it is better to register a partnership firm because an unregistered firm cannot avail of any legal benefits provided by the Partnership Act, 1932. 

Documents Required for General Partnership

The following documents are required for the registration of a partnership firm (whether registered or not): 

1. Partnership Deed
2. GST Registration
3. Open a Bank Account
4. Firm PAN Card
5. Address Proof of the Firm

What are the legal benefits provided for the registered Partnership firm?

A registered partnership firm has the benefit to file a suit in its own name in court against a third party for a breach of contract. Whereas an unregistered firm cannot file a suit against a third party but such a third party can file against the firm. 

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Choosing the ideal legal entity for your business should be done in consultation with a legal professional. Your Virtual Legal Counsel can guide you to set up the most preferred legal entity for your business. Your Virtual Legal Counsel will work with you as a partner in incorporating and protecting your business. Schedule a meeting with YVLC to discuss the ideal structure for your business to set up in India.