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General Partnership Firm

What is a General Partnership (GP) Firm?

A General Partnership Firm (many times referred as Partnership Firm) is a business entity formed by 2 or more people. This business form has not been very popular in India in recent few decades. A GP is not a separate legal entity in the eyes of law. Although it is treated as a separate entity for all taxation purposes (direct taxes or indirect taxes). The law also allows the partners of a GP firm to sue or to be sued in the name of firm (only applicable for registered firms). As per Indian Partnership Act, 1932, 'partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.

How to register a General Partnership Firm?

A GP firm doesnot require mandatory registration. This means the partners may decide to register the firm with Registrar of Firms or may choose to conduct business without any registration. A partnership deed is a must and forms the basis of various relationship and governing factors between partners. A partnership deed should contain details of:

  • Initial Capital contribution
  • Profit/ Loss sharing ratio
  • Duration of business 
  • Nature and  place of business
  • Duties and rights of partners
  • Salary or commission payable to partners
  • Other terms & conditions to run the business

What licenses are required to run a Partnership Business?

Although registration of Partnership firm is optional, all specific business licenses are required to be obtained depending on their applicability. e.g. if you are providing a service and has a turnover more than 10 Lacs in a particular financial year, you need to obtain service tax registration. Click here for a list of common licenses required to run a business.

General Partnership Firm

  • Easy set up process. Registration is optional.
  • Easy to start and Easy to close. Business can be closed whenever the partners decide
  • Can open a separate bank account in the name of the business
  • Specific licenses are applicable as required by nature of business. Can apply and obtain for trademarks, patents, copyrights and other IP assets
  • Associated with lower capital requirements
  • Every partner has an equal say in decision making
  • In special cases, minor can be a partner with some conditions. In case of loss, his/her liability is restricted upto the contribution in firm. No restrictions or limit on profit sharing
  • Remuneration to partners exempted from tax
  • Fewer compliances requirements

Disadvantages of Partnership Business

  • No. of partners cannot exceed 20
  • Not a separate legal entity
  • Associated with lower capital requirements
  • Foreign nationals cannot form partnership
  • Partnership business can be dissolved at the will of all partners or even one partner can give notice for dissolving the same. It can also come to an end on death, insolvency, incapacity or retirement of any partner
  • A partner cannot sell shares or interest in Firm without consent of all other partners
  • Unlimited Liability. If the company has debts or runs into troubles e.g. penalty or lawsuit, the partners are 100% liable to clear the same. This could mean selling off personal assets and other balances to clear the same.

Steps to Start a Partnership Firm

  • Finalise a business name
  • Prepare Partnership deed which will govern the relationship and other aspects of business
  • Register the company with Registrar of Firms (optional)
  • Obtain PAN card for the Partnership Firm
  • Obtain various licenses required to run a business
    • May require ID proof e.g. PAN card
    • May require Address proof e.g. Bank Statement, Rental agreement etc.
  • Open a Bank account
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