5 lessons to know before partnership firm registration
Business partnerships play a vital role in the success of new ventures. They come with an extra managerial support - a blend of intellectual, monetary capital and skills. Stay alert with a few aspects of partnership firm registration in India prior to the process initiation. Maintaining partnerships is a task since factors like ego, money, disagreements can lead to a fallout.
Consider the following before you go for partnership registration
1. Do not rush in choosing a partner.
A lot of thought should go in choosing a right partner for your business. People with similar mind-sets, goals, and values usually create successful partnerships. Before you sign the partnership deed it is better to gauge your options. Networking is a great way to begin. It would help you to understand the other persons work methods and values.
Partnerships are dependent on two or more individuals working together for making profits in a business. If one of them disagrees with the other, it can harm the business. Hence, it’s best to choose your partner cautiously for a successful business arrangement.
2. Partnership Registration is highly recommended
Partnership registration is critical as the nature of partnerships is uncertain. All the clauses when spelt out create a sense of transparency. That is why it is recommended to create a balanced Partnership Agreement for partners.
Here are some of the benefits of partnership deed registration:
- Gives partners the ability to file a case against third parties, and other partners
- Grants the power to claim set-off against any third-party claim
- It's easier and faster to convert into any other business structure if the partnership is registered
The following are the essentials of a balanced and a well-drafted deed:
- The name of the partnership: Preferably, it should be unique and original to have distinct recognition in the target audience/market
- Partners' contribution: Can be in form of Property, Services, or Cash. Their valuation as well as what ownership percentages the partners would have
- Profit and loss allocation: Details about the divisions of profit and loss
- Partners’ Authority: It covers aspects of decision-making, specifying who shall have a final say. The deed should also include if any decision requires a majority vote or a unanimous consent
- Management duty: An ideal deed will include splitting-up duties amongst the members along with an individual's responsibilities
- New partner admittance: Should include details on how to bring in new partners. Establishing a system will make it easy to take decisions for getting new people on board
- Partner withdrawal: A withdrawal process for a partner(s) by death or choice will prevent roadblocks in a partner's absence. Creating a buyout scheme is advisable
Dispute resolution: Specifics about dispute resolution schemes must include ADR or court-order to handle disputes.
3. Look into LLP registration
Limited Liability Partnership is an ideal option to create a more secure structure than the general partnership. It keeps the liabilities among the partners limited.
LLP Registration offers the following benefits
- Liability protection: One partner would not be held liable for the actions of the other
- Tax Advantages: LLP gets extra benefits while other requirements remain the same as the general partnership
- A separate legal entity from the partners: Allowing an LLP to own assets in its own name
- Continuous existence: Exit or death of partners does not affect the LLP
- Increases the credibility: Raising funds from financial institutions becomes easy
Hence, the risk is less.
4. Be careful in deciding the capital distribution
Capital is the fuel that ensures the running of every business. One can make capital contributions at any stage of the partnership firm registration. It can be your resources, money, contacts etc. Giving all your capital can create differences and clashes. Moreover, sharing expenses by dividing duties makes dissolution simpler.
The clause should specify:
- Partners initial contribution to the firm
- Changes made in the capital amount
- If there is no contribution from any partner the deed should specify that too
The stamp duty amount is dependent on the capital invested during the registration.
The contribution can be made in various forms:
- In cash
- Tangible Assets, which can be machinery, land, inventory, building etc.
- Intangible Assets, these include intellectual properties, goodwill, customers etc.
The partnership agreement must include the asset valuation as contributed by each partner. This makes dissolution easier by dividing share between the partners. Along with the deed, books of accounts should have all this information.
An additional agreement is required in case of a change in total capital or in an individual partner's investment it. And if the partnership deed is registered, the changes are to be notified to the RoF.
5. Organize an exit strategy
The partnership agreement should have a specific exit plan. It should define
- The procedure
- Details about the distribution of profits
- The firms' dissolution strategy
An exit strategy should be such that it allows you or your partner to walk away from the partnership, or that provides options to buy out the other party. Voting rights are a must to avoid deadlocks, especially where it’s a 50/50 share partnership. Taking a third party on the board can help solve issues, as he can act like a tiebreaker.
These are some of the essentials one needs to be aware of before starting a partnership firm. These key points can help you make better decisions regarding the partnership firm and establish a successful business. Partnerships are great to start out with. But as one grows many other business structures can be opted for according to one's requirements.
Shrijay Sheth is the co-founder at LegalWiz.in. LegalWiz provides legal consultancy and accounting services for Indian business entities; ranging from registering a business to bookkeeping. Shrijay is a seasoned entrepreneur and a serial Startup evangelist with interests in eCommerce, legal services, and business consultancy.
Partnership firm registration in India is simpler when assisted by LegalWiz.in professionals. For reliable professional assistance to register a partnership or any query related to such, connect with the experts at Support@LegalWiz.in