A partnership is a kind of business where a formal agreement between two or more people is made who agree to be the co-owners, distribute responsibilities for running an organization and share the income or losses that the business generates.
In India, all the aspects and functions of the partnership are administered under ‘The Indian Partnership Act 1932’. This specific law explains that partnership is an association between two or more individuals or parties who have accepted to share the profits generated from the business under the supervision of all the members or behalf of other members.
Main Features of Partnership
- Agreement between Partners: It is an association of two or more individuals, and a partnership arises from an agreement or a contract. The agreement (accord) becomes the basis of the association between the partners. Such an agreement is in the written form. An oral agreement is evenhandedly legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the written agreement.
- Two or More Persons: In order to manifest a partnership, there should be at least two (2) persons possessing a common goal. To put it in other words, the minimal number of partners in an enterprise can be two (2). However, there is a constraint on their maximum number of people.
- Sharing of Profit: Another significant component of the partnership is, the accord between partners has to share gains and losses of a trading concern. However, the definition held in the Partnership Act elucidates – partnership as an association between people who have consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital.
- Business Motive: It is important for a firm to carry some kind of business and should have a profit gaining motive.
- Mutual Business: The partners are the owners as well as the agent of their firm. Any act performed by one partner can affect other partners and the firm. It can be concluded that this point acts as a test of partnership for all the partners.
- Unlimited Liability: Every partner in a partnership has unlimited liability.
Advantages of Partnership
- Easy Formation – An agreement can be made oral or printed as an agreement to enter as a partner and establish a firm.
- Large Resources – Unlike sole proprietor where every contribution is made by one person, in partnership, partners of the firm can contribute more capital and other resources as required.
- Flexibility – The partners can initiate any changes if they think it is required to meet the desired result or change circumstances.
- Sharing Risk – All loss incurred by the firm is equally distributed amongst each partner.
- Combination of different skills – The partnership firm has the advantage of knowledge, skill, experience and talents of different partners.
Rate of Income Tax Applicable to Partnership Firm
Flat rate of 30% on the total income after deduction of interest and remuneration to partners/Designated Partners at the specified rates + Surcharge of 12% if Total Income exceeds 1 Crore and will be further increased by education cess secondary and higher education cess @ 3% on Income-tax (Wef A.Y. 2019-20 health and education cess @ 4% shall be levied in lieu of education cess secondary and higher education cess @ 3% )