Startup entity - Partnership

Next step to operating as a solo bird is forming a partnership with other like-minded people.

Partnership is a vehicle which is commonly used as an entity for startups. Even the government of India recognises a registered partnership as an eligible entity for seeking benefits under various schemes of the government.

A partnership is governed by the provisions of Indian Partnership Act, 1932.

Two or more partners can join hands for a business relationship, execute a partnership deed and register it with appropriate authorities. The partnership deed, among other things, stipulates the respective capital contributions, rights and obligations, profit share, etc. of partners.

A partnership is certainly more structured than operating as a single owner and it has the benefit of pooling the expertise, contacts, resources, finances and efforts of different people. A partnership is governed by the partnership deed. It also has the advantage of being easily wound up, if things do not work out commercially or otherwise between the partners, which is a big botheration for a corporate entity. By and large, this is most cost effective and least formal structure.

However, a partnership firm is not a separate legal entity (like a company or LLP). Only for taxation purposes, it is taxed separately than its partners. Further, the liability of partners is unlimited, unlike in case of LLPs and companies.

However, this structure is preferred by entrepreneurs who are in trial and experimenting stage and who do not contemplate too big a business forthwith exposing their personal assets. When the business reaches a size and scale, a partnership can be converted into an LLP and the partners can have the benefit of a more formal structure, perpetual existence, limited liability, etc.

This structure isn’t preferred by investors, nor is open to FDI. So, this isn’t a structure for the entrepreneurs looking for external funding at some stage.  

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About the author :

Bhumesh Verma is a Corporate Lawyer with over 2 decades of experience in advising domestic and international clients, with a place in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters. He can be reached at bhumesh.verma@corpcommlegal.com.