When one is starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks other sources of finance.

Also the amount of money that the sole proprietor can contribute to the business “alone” is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow.

A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decision

For all the above reasons, one may choose to form a partnership firm right from the start or later change their firm to a partnership firm. So, one may start a partnership firm with the objective of pulling in people so that more capital is generated or making specifically skilled people partners so that wise business decisions may be made.

Definition Of Partnership:

"Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually" partners" and collectively" a firm", and the name under which their business is carried on is called the" firm name".


In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken togethe
Explanation I : The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.
Explanation II : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not itself make him a partner with the persons carrying on the business.and, in particular, the receipt of such share or payment -

  • by a lender of money to persons engaged or about to engage in any business
  • by a servant or agent as remuneration,
  • by the widow or child of a deceased partner, as annuity, or
  • by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof,

does not of itself make the receiver a partner with the persons carrying on the business.
Lawful business:
The partners should always carry on any kind of lawful business. To start a business in smuggling, black marketing, etc., is not termed as a partnership business in the eye of the law. Again, doing social work is not termed as a partnership business.
Competence of partners:
Since individuals join hands to become partners, it is necessary that they must be “competent” to enter into a partnership. Thus, minors, lunatics and insolvent people are not eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only.
Depending on the reason behind which a particular partnership is made, partners may be of different types. To understand this better, consider the following:
Active partners:
The partners who actively participate in the day-to-day operations of the business are known as active partners. They contribute capital and are also entitled to share the profits of the business. They also share the losses that the business faces.
Dormant partners:
Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or “sleeping partners”. They only contribute capital and share the profits or bear the losses, if any.
Nominal partners:
These partners “only” allow the firm to use their “name” as a partner. They “do not” have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the business of the firm. However, they do remain liable to third parties for the acts of the firm.
Minor as a partner:
In special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.
As we have explained before, it is not “necessary” to registar a partnership with the Govt. in most states of the country.
However, if you do not register your partnership, you will not be legaly protected from disputes between partners etc. as we have explained before. So, it is always wise to register your parnership with the Govt.
In any case, even if you choose not to register your partnership, you should still prepare a “Partnership Deed” which will help resolve problems when disputes between partners arise.
The general procedure for registering a partnership firm all over India is quite similar:
You have prepare a “Partnership deed”
Fill in the required form at the “Registrar Of Firms” office near you.
Submit the required form, the “Partnership Deed” and other supporting documents to the “Registrar Of Firms” for approval.
Preparing the “Partnership Deed”
The “Partnership Deed”, as stated above, must contain:

  • The amount of capital contributed by each partner
  • Profit or loss sharing ratio
  • Salary or commission payable to any partner, if any
  • Duration of business, if any
  • Name and address of the partners and the firm
  • Duties and powers of each partner
  • Nature and place of business; and other terms and conditions to run the business

The partnership deed is usually not very hard to prepare through a local lawyer.
This partnership deed must be made on stamp paper as per the laws of the place of signing. The whole process of drafting the partnership deed can be done through a trusted lawyer.
After preparation of the deed, it must be signed by all the partners. It must also have signatures of independent witnesses. The deed is then submitted to the “Registrar Of Firms” along with the registration form and other supporting documents. On approval of these documents by the “Registrar Of Firms” the “Partnership Firm” is established as a legal entity and can start business under the chosen name.
Availability of large resources:
Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship. The partners can contribute more capital, more effort and more time for the business
Better decisions:
The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict, they can sit together to solve the problem. Since all partners participate in the decision-making process, there is less scope for reckless and hasty decisions.
Flexibility in operations:
A partnership firm is a flexible organization. At any time, the partners can decide to change the size or nature of the business or area of it’s operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.
Sharing risks:
In a partnership firm all the partners “share” the business risks. For example, if there are three partners and the firm makes a loss of Rs.12,000 in a particular period, then all partners may share it and the individual burden will be Rs.4000 only. Because of this, the partners may be encouraged to take up more risk and hence expand their business more.
Protection of interest of each partner:
In a partnership firm, every partner has an equal say in decision making and the management of the business. If any decision goes against the interest of any partner, he can prevent the decision from being taken. In extreme cases an unsatisfied partner may withdraw from the business and can dissolve it. In such extreme cases the “partnership deed” is required. In absence of the partnership deed, no legal protection is given to the partners.
Benefits of specialization:
Since all the partners are owners of the business, they can actively participate in every aspect of business as per their specialization, knowledge and experience. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, and another in labor cases and so on as per the individual specialization. Similarly, two or more doctors of different specialization may start a clinic in partnership.