CA Manish Mishra discussing One-Person Company Concept

What Is One-Person Company?

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Companies Act, 2013 revolutionized Indian corporate law by introducing many new concepts. One-person companies were game-changers. This factor resulted in a new way to start businesses. A company entity offers flexibility, protection, and limited liability.

What is an One-Person Company?

A one-person company or OPC is defined in section 2(62), Companies Act, as one company with one member. Members of a company can only be subscribers to the memorandum or shareholders. An OPC is a company with only one shareholder.

These companies are usually created when there is one promoter/founder. Moreover, OPCs are preferred by entrepreneurs whose businesses are in their early stages of growth over sole proprietorships due to the many advantages OPCs provide.

The Features of a One-Person Company

These are the main characteristics of a single-person business:

Private company: According to Section 3(1)(c), the Companies Act, a single person may form a company for any legal purpose. OPCs are also classified as private companies.

OPCs are limited to one shareholder or member, and OPCs cannot have other private companies.

Nominee: OPCs are unique in that the only member of the company must mention a nominee when registering the company.

No perpetual succession: Because there is only one OPC member, the nominee can accept or decline to be its sole member. As they do not follow the principle of perpetual succession, this does not occur in other companies.

OPCs must have at least one director. Maximum 15 directors are allowed.

Companies Act 2013, 2013 does not prescribe any minimum capital requirement for OPCs.

OPCs have special privileges: OPCs are entitled to certain exemptions and privileges under the Companies Act, which other types of companies don’t enjoy.

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One-person companies

One person can form an One-Person Company by signing a memorandum and complying with other requirements required by the Companies Act, 2013. This memorandum must include details about a nominee to become the company’s sole member if the original member becomes incapacitated or dies.

The memorandum, along with the application for registration, should be submitted to the Registrar of Companies. The nominee may withdraw his name at any time by submitting the necessary applications to the Registrar. The member can also cancel his nomination later.

Membership in One-Person Companies

India is only open to Indian citizens and residents who are natural persons. Nominees for OPCs are subject to the same conditions. Additionally, such a natural person can’t be a member of or nominee for more than one One-Person Company at the same time.

Natural persons can only join OPCs. Further, this aspect is not valid for companies that own shares or are members. The law also prohibits minors from being members or nominees for OPCs.

The difference Between OPCs & Sole Proprietorships

Although a sole proprietorship business form might look very similar to one-person businesses, there are some significant differences. The only difference between them is the liabilities that they have. An One-Person Company is an independent legal entity that is distinct from its promoter. It has its own assets as well as liabilities. The company’s debts are not the responsibility of the promoter.

Seasoned Chartered Accountant with over 15 years of industry experience. As a Virtual CFO and Startup Advisor, I'm passionate about supporting startups and small businesses on their journey to success. With a dedicated team by my side, we offer simple and practical financial advice to help you achieve your goals. Virtual CFO | Startup Advisory | NBFC & FinTech I Building Startup ecosystem to support the startups.
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What is a Private Limited Company

What is a Private Limited Company

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A private limited company is a corporate entity that enables a group of people to carry out a business. The group of people thus running the business are called the shareholders. Although there are different types of corporate entities to incorporate a business, a private limited company is chosen by quite a number of start-ups as it gives scope for higher visibility and popularity amongst the potential clients. Further, a private limited company is a separate legal entity and is different from its members. Therefore, the company is eligible to enter into contracts, can sue, and be sued by third parties, by itself. Moreover, the company has perpetual existence.

Another reason why a private limited company has an edge over the other corporate counterparts amongst the VCs and start-ups is that it presents funding options like private equity, ESOP etc. Further, fundraising and borrowing from financial institutions are relatively easier for private limited companies.

Establishing a Private Limited Company in India: Criteria Under the Companies Act, 2013

The private limited company was evolved under the Companies Act, 2013 under the Ministry of Corporate Affairs (MCA). The Act defines a private company as

i)One that has a minimum paid-up share capital

ii)one that renders the shares nontransferable

iii)a company that should have a minimum of 2 and a maximum of 200 members, the exception being a one-person company

iv) A company where the public cannot subscribe to the shares of the company.

If a company does not follow the rules as pointed out by the Act, it is not or ceases to be a private limited company.

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What Are the Different Types of Company Registrations in India:

Although a private limited company is best-liked by many budding businesses, there are also other forms of company registrations that are being done. In short, there are no right or wrong choices, when it comes to choosing a corporate entity for the business. Likewise, it merely depends upon the key factors such as the type of the business, number of shareholders, their tax obligations, etc. Further, the primary types of company registrations are as follows:

  •   Public Limited Company Registration
  •   Private Limited Company Registration
  •   Partnership Firm Registration
  •   Limited Liability Partnership (LLP) Registration
  •   One Person Company (OPC) Registration
  •   Proprietorship Firm Registration

Although there are various types of companies, the most prevalent ones are public and private limited companies. There does exist a wide variety of differences between public and private limited companies.

No. Public Limited Company Private Limited Company
1 The public has access to own the shares of the company The company isn’t listed on the stock exchange and the public does not have access to the shares.
2 There should be a minimum of 7 members There should be a minimum of 2 members
3 There is no limit on the maximum number of members a company can have There can be a maximum of 200 members except in the case of One Person Company (OPC).
4 There should be a minimum of 3 directors There should be a minimum of 2 directors.
5 The shares are not easily transferable The shares are freely transferable
6 A public company can issue a prospectus A private company is forbidden from issuing a prospectus.
7 Holding a statutory meeting is mandatory. Statutory meetings are not compulsory.

What are the Documents Required for the Formation of a Company?:

  • Proper Identity Proofs such as PN card, Aadhar card, a valid driving license, or an Indian passport of the standing directors and shareholders of the company
  • Moreover, valid proofs of the address of the company’s directors and shareholders, such as the most recent telephone bills, electricity bills, and statement of accounts from the bank
  • Rental agreement and a NOC from the owner, if the company’s registered office is in a rented property
  • Sale deed, if the company is situated in its own property
  • Director Identification Number (DIN) and Digital Signature Certificate (DSC) is required for the directors of the company.

What Is the Process to Register a Company in India?:

Despite the fact that the company registration process is not very tedious, it requires a series of steps to be followed and also mandates the submission of the requisite documents as elucidated earlier. Therefore, the right option would be to delegate the registration to concerns that carry out company registration services.  

Also being a perpetual corporate body, a company has a number of compliances that have to be met. The following are the various steps that have to be adhered to, to get a private company registered.

Step 1

The first step would be to acquire the DSC for the directors of the company.

Step 2

The DIN must be obtained from the MCA. The DIN is a unique 8 digit number through which the details of the directors are maintained in the database.

Step 3

The availability for the name of the company must be checked, by making an application for the same.

Step 4

The forms  SPICe+ and INC-32 are to be duly filled and submitted while making an online application.

Step 5

The Memorandum of Association (MoA) and the Articles of Association (AoA) are to be presented.

Step 6

An application must be made for PAN (Permanent Account Number) and TAN (Tax Deduction Account Number) mandatorily to get the company registered.  

The registrar verifies the documents and if it is satisfactory, the certificate of incorporation (COI) is awarded along with the PAN and TAN. Further, once the company registration certificate is received, an account has to be begun in an authorised bank in the name of the company to perform the financial transactions of the company.

How to Find the Company Registration Number (CRN):

The CRN can be found on the official MCA website. Various details with respect to the company such as its CRN, its directors, type of the company, etc can be deduced from the website.

Step1 : In the MCA home page, an option called “MCA Services” is present. On Selecting that a dropdown appears.

Step 2: Moreover, on Selecting “Master Data” from the options, another list appears. Select “View Company or LLP Master Data”.

Step 3: On selecting the above option, the user is navigated to the next page, wherein the user is supposed to enter the name of the company, and the CIN. The entered data is checked with the database, and the relevant information about the company such as the date of incorporation, registration number, the status of the company, etc are fetched.

How Long Does it Take to Register a Company?

Now that the majority of the operations pertaining to the registration of a company take place online, the process is completed within 9-10 days, provided all the necessary documents are ready. The time frame is also inclusive of the time taken to get the DSC, the DIN, and the name approval for the company.

What Is the Cost of Registration of a Company in India?

 The fee to be given to the government to register companies was waived effective from January 2019. Also, previously, the registration costs of a private company would vary depending upon the shared capital of the company. But now, the concept of minimum shared capital is not being considered. Further, the professional fee for the registration of companies varies depending upon the processes and complexities involved in getting the company registered.

Further, the various forms of company registration cost in India would be somewhere from ₹1500/- to ₹15000/-. The cost would also depend on the state taxes. Likewise, when it comes to the registration of a private limited company, the cost would come ₹6000/- to ₹60,000. This would again depend on various factors like the number of members present in the company, number of directors, etc along with the professional fee.

Thus, registering a private limited company is the first step in establishing a successful business. Similarly, an eminent entrepreneurial journey depends on how well the key decisions are taken. Right from the business to be established, to the corporate entity to be taken for the respective business, an entrepreneur has to pitch in at various instances to take the right decision.

Moreover, that being said, getting into the intricacies of registrations and taking care of the compliances can turn burdensome to any business owner. Further, to ease such challenges, our experts here at VakilSearch can help the business be registered at the quickest possible without any hassles, as we clearly understand how important the business is for every entrepreneur. Moreover, a business owner can thus rest assured that the registration of the company will be accomplished at the snap of a finger when done by us.

Seasoned Chartered Accountant with over 15 years of industry experience. As a Virtual CFO and Startup Advisor, I'm passionate about supporting startups and small businesses on their journey to success. With a dedicated team by my side, we offer simple and practical financial advice to help you achieve your goals. Virtual CFO | Startup Advisory | NBFC & FinTech I Building Startup ecosystem to support the startups.
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What is the Procedure for Company Formation

What is the Procedure for Company Formation

by with No Comment Business

Curious about the procedure for company formation in India? Learn all about the step-by-step process and legal requirements for establishing your business with our comprehensive guide on Procedure for Company Formation in India.

A company is a separate legal entity, and a systematic approach is followed to get it incorporated legally. Until then, the company is merely non-existent. Regardless of a company being a public, private, or one-person company, it has to undergo the step-by-step procedure for new company registration in order to become an authenticated legal body. The Companies Act, 2013 regulates the process of incorporation of public and private companies.  

Procedure for Registration of Company:

A private limited company is often chosen by entrepreneurs and professionals not only because of the fact that it offers limited liability to its members but also because it is easier compliance-wise, for instance to avail loans from banks. The procedure for registration of the company under the Companies Act, 2013 is quite comprehensive, but once it is accomplished, it would ensure that the company’s dealings happen in a phased and systematic manner. Like in any legal procedure, the registration of a company also has a set of prerequisites that has to be adhered to as enlisted below:

The number of members:

There must be a minimum of 2 members and a maximum of 200 members.

Digital Signature and DIN:

 Digital Signature and Director Identification numbers for the directors of the company should be obtained.

Name of the Company:

An application for the name of the company should be sent to the Registrar. Usually, more than one name is submitted to the Registrar, so it would be feasible if one of them is identical or similar to the name of any other existing company. A unique name will be picked out by the Registrar from the names that were submitted. The name should have the words ‘Private Limited Company’ appended to the end.

 

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Incorporation of the Company:

The following have to be submitted in order to get the company registered:

  • Articles of Association and Memorandum of Association.
  • Affidavits from the Directors.
  • A declaration stating that the rules of the Companies Act, 2013 have duly complied.
  • ID proofs like a PAN card and an authenticated passport copy to be submitted.
  • Ration Card or Aadhar card to be submitted as proof of address.
  • Proof of Residence such as bank statements or recent electricity bills, telephone bills, are to be submitted.
  • If the company is in rental space, the notarized rental agreement and a NOC from the owner are needed.
  • If it’s an own property, the sale deed is to be presented.

After verifying the documents, the RoC offers the certificate of incorporation, with the PAN and TAN. It is essential that once the registration is done, a current account is opened in the bank in the name of the company, to carry out the financial transactions.

Incorporation of a Public Company:

Just like a private company, a public company also has a few prerequisites in order to get registered.

  • At least 3 Directors and 7 shareholders are required to get a public company registered legally.
  • There should be a share capital of at least 5 lakhs.
  • DSC and DIN are to be obtained.
  • An appropriate name for the company is to be selected.
  • The application made for registration should comprise the main objectives of the company.
  • The Application made to the RoC should contain the MoA, AoA, form DIR-12, Form INC 7, and form INC – 22 along with the stipulated fee for registration.
  • The application for the business commencement certificate is to be made once the RoC has granted approval for the registration.

Procedure for Public Company Registration

The procedure for registration is almost similar to that of a private company. The address of the company has to be registered with the RoC of the respective jurisdiction. The name of the company has to be accepted by the RoC. Once the name is approved, the MoA and AoA are to be submitted to the RoC for validation.

If there are no disparities in the documents that were hence put forward, the RoC registers the company and awards the certificate of incorporation along with the CIN (Corporate Identification Number). It is imperative that an application for the Certificate of commencement is made within 180 days from the date on which the Certificate of Incorporation was obtained.  

Thus, the process for registration of companies, whether public or private is fairly similar, although a bit too exhaustive. Having the right hands to help, will enable the registration process to be much simpler. Thus, the first step of starting a company is going ahead with the registration in order to render a proper legal identity to the business.

Seasoned Chartered Accountant with over 15 years of industry experience. As a Virtual CFO and Startup Advisor, I'm passionate about supporting startups and small businesses on their journey to success. With a dedicated team by my side, we offer simple and practical financial advice to help you achieve your goals. Virtual CFO | Startup Advisory | NBFC & FinTech I Building Startup ecosystem to support the startups.
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5 REASONS FOR REGISTERED PARTNERSHIP FIRM CA MANISH

5 Reasons to Register Your Partnership Firm

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Most start-ups in recent times are thus evolving as partnership firms. Predominantly, the business types in India are either proprietorship firms or partnership firms. Partnership firms are the most common ones among the two. Partnership firms in India are led by the Indian Partnership Act, 1932.

In a partnership firm, the odds of having a successful business are high. The partners share their business ideas and complement each other’s weaknesses. On the other hand, as in any business, there are chances that it may not do well as intended. Or even worse, the firm may not do well merely because of one or more partners. Under these circumstances, differences may arise and might call for legal action. It is for this reason that it is preferable to have the firm registered. 

Benefits of Registering a Partnership Firm:

The advantages of registering a partnership firm are:

Potential to sue the firm or sue the other partners:

If any conflict should arise between the partners or between the current and previous partners or even between one of the partners and the firm itself, and provided the conflict thus arising is out of the terms dictated in the partnership deed or the dispute is upon the rights vested on the partner by virtue of the Partnership Act, then a partner belonging to the firm in which the partnership is registered can always move to the Courts of Law. This privilege is not given to a partner of an unregistered firm, although he can initiate a criminal proceeding against the wronged partner(s). 

The capacity of the firm to sue third parties:

In a registered partnership firm, one or more partners can always file a case in court when any of their contracts are not honoured. Partners of an unregistered firm are not given this lenience. 

Right to use the principle of set-Off:

If the partnership firm is issued by another party to recover a sum the firm owes to this party, the firm can use the principle of set-off against this third party provided the latter also owes some amount of money to the partnership firm. The registered partnership firm can simply counterbalance the amount it owes to the third party. This arrangement is not feasible in the case of unregistered partnership firms. 

 

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Better credibility:

 Despite the fact that the Partnership act renders both a registered and unregistered firm legal, it is a, sure enough, case that a registered partnership firm looks more credible in the eyes of a potential client.

Ability to convert into an entity:

A registered partnership firm always has the ease of converting itself to another corporate entity like that of a Limited Liability Partnership (LLP) or a private company. This ease of conversion is not bestowed upon an unregistered firm. 

Procedure to register a partnership firm:

Partnership deed:

When the partners decide to register their firm, the foremost thing they should be ready with is a partnership deed. The deed shall be drafted as prescribed in the Indian Partnership Act, 1932. Depending upon the business and the terms and conditions between the partners the deed can be finalised. A deed delineates various elements that are critical to run a successful business, such as salaries to be given, allocation of profit and loss, interest on capital, exit strategies etc., 

Execution of partnership deed:

Once the existing partners have a consensus over the drafted deed, the next course of action would be to execute the deed by paying the stipulated stamp duty. The stamp duty depends on the state where the deed is getting registered. It is also imperative that the deed should be notarized. The deed should be duly signed by all the partners. Additionally, the signature of the witnesses also shall be captured in the partnership deed. 

Stamp duty and notary procedure:

The execution of the partnership deed surfaces up once the stamp duty payments are made as directed by the Stamp Act of the respective state where the business of the firm is stationed. The execution of the deed can be done either on a non-judicial stamp paper or by means of franking. The main difference between stamping and franking is that while stamp duty signifies the legality of the documents. It is the franking implies that charges or taxes such as stamp duty has been deposited. In franking, payment is made through the banks and it is comparable to a stamp paper. Once the stamp duty is paid, the signatures of the partners and the respective witnesses are obtained, the deed is notarized. 

Obtaining a PAN for the partnership firm:

A Permanent Account Number (PAN) can be applied either before or after the registration of the said partnership firm. The same can be done both in online and offline modes. While making an application for registering the partnership firm, most of the states, give the provision to apply for PAN. The application for PAN shall be substantiated with a supporting copy of the partnership deed. 

Partnership deed registration:

The Registration of the firm is done with the Registrar of Firms (RoF), in whose jurisdiction the partnership firm is situated. Details such as the firm’s name, names of the partners and their respective contact details, place of business, the time frame during which the business was active etc are furnished within the application form. The Registrar can demand the submission of documents and proofs as required and the partners are required to provide the same. 

Opening of a bank account

The sole purpose of the partnership firm is to carry out a commercial activity most often. Therefore, it is evident that the business requires a bank account to carry out the daily activities on behalf of the firm. A current account is therefore initiated in the name of the firm. All the required documents pertaining to the partnership firm are submitted to the bank.

Although the Indian Partnership Act, 1932 does not mandate that a partnership firm needs to be registered. The Act mentions that the firm can any time get itself registered after its incorporation. Except that, an application for registration cannot be made after a third party has commenced a suit against the partnership firm. Although a partnership firm is begun with the best possible optimism initially, the entering partners should be practical and be clever enough to foresee the necessary evil and take informed decisions by registering their partnership firm. 

Seasoned Chartered Accountant with over 15 years of industry experience. As a Virtual CFO and Startup Advisor, I'm passionate about supporting startups and small businesses on their journey to success. With a dedicated team by my side, we offer simple and practical financial advice to help you achieve your goals. Virtual CFO | Startup Advisory | NBFC & FinTech I Building Startup ecosystem to support the startups.
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WHY LLP IS BEST CA MANISH MISHRA

Why LLP Registration is the Best Option for You

by with No Comment Business

A Limited Liability Partnership (LLP registration), as the name proposes, is a corporate business entity that enables a partnership between the business partners wherein their liabilities are proportional to the amount with which they venture into the business respectively. While partnership firms have been in practice for ages, LLP firms are relatively new players in the corporate sphere. 

In an LLP, the partners fundamentally divide the risks proportionately while offering their shared skill set to leverage the business. Another notable difference in the LLP is that, if the business doesn’t take off as planned and if the partnership fails in dire circumstances, the creditors cannot claim the personal property of the partners. Here, it can be stated that the LLP by itself is responsible for the debts incurred during the course of the business rather than the respective partners of the firm.

In other words, it’s a body corporate and is an individual legal personality and is separate from its partners. Also, an LLP is of perpetual succession. It would live on forever even after the partners cease to exist. Partners may come and go, but the LLP will stay on for eternity. An LLP is a corporate culmination of the advantages of a partnership firm and that of a limited liability company. 

The minimum requirements for incorporating an LLP would be:

  • The LLP should be working with a minimum of two partners
  • At least one of the partners must be an Indian citizen and should be living in India
  • The registered office of the LLP firm must be located in India. 

Like any other company, it would mandate that the LLP possesses a unique name and the same should have the words ‘LLP’ appended to the name in order to show that the firm operates as one. 

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Operating as an LLP possesses quite a number of advantages as stated herewith:

Ease of Incorporation:

The fact that formulating an LLP has fewer guidelines and simpler protocols make it the most sought out corporate entity. The procedures with respect to annual meetings, board meetings, legal compilation, etc are quite minimal. Further, even the cost of incorporating an LLP is comparatively economical as against incorporating a public or a private limited company.

The responsibility of an LLP when it comes to compliance is much simpler. For instance, one needs to submit only two statements of accounts yearly i.e., the annual return and a statement of accounts and solvency. While a public or private company has to pay heed to its board of directors, an LLP is merely dependent on its partners for major decisions and votes. Additionally, the ownership in the case of an LLP is also easily transferable from one person to another. However, the person to whom the ownership is being transferred must be imbibed in the LLP as a partner.  

Absence of Minimum Capital Requirement:

A large category of entrepreneurs romanticizes the idea of an LLP as it does not obligate a minimum capital requirement to incorporate the same. Here, capital can be either a tangible or an intangible asset. Therefore, an LLP can be accomplished with the least required capital as per the wish of the partners.

No Limit of Business Owners:

But for the minimum requirement of at least two partners, there is no limit to the maximum number of partners the LLP can comprise of. On the other hand, in the case of a private limited company, there lies a limitation that it should not have more than 200 members. 

Tax Benefits:

The major advantage when it comes to an LLP is that while being treated on par with partnership firms, the LLP is liable to pay the tax while the partners of the LLP are not liable to pay the same. Dividend distribution tax is thus not payable in the case of an LLP. ‘Deemed dividend’ is therefore not relevant with respect to LLP firms. Various expenditures incurred during the course of the business such as payment of salary to the partners, other remuneration like a bonus, etc are sanctioned as deductions. Also, the dividend distribution tax which is levied for companies when the partners withdraw the profit from the company is not applicable in the case of an LLP.

Do Not Require a Compulsory Audit:

Companies that are incorporated, whether they are public or private, regardless of the share capital have to submit their accounts for auditing. Here, LLP is an exception, as there are no such hard and fast rules that mandate an LLP to get their accounts to be audited. However, an LLP is required to undergo auditing when:

  • The contributions of the LLP exceed ₹25 Lakhs
  • The annual turnover of the LLP exceeds ₹40 Lakhs. 

Given the wide ambit of perks an LLP has to offer as compared to private partnership firms, this has become the most fitting option for budding entrepreneurs and venture capitalists. Yet, it has to be accepted that not all businesses find LLPs to be accommodative. A few of them opine that the lack of a single business head and engaging all the partners to make decisions can be a challenge in running an LLP efficiently. However, this has been the most preferred corporate body as per many professionals like accountants, auditors, lawyers etc.

When it comes to LLP incorporation, however, there’s only one choice for you. Reach out to the experts at Vakilsearch and get going today!

Seasoned Chartered Accountant with over 15 years of industry experience. As a Virtual CFO and Startup Advisor, I'm passionate about supporting startups and small businesses on their journey to success. With a dedicated team by my side, we offer simple and practical financial advice to help you achieve your goals. Virtual CFO | Startup Advisory | NBFC & FinTech I Building Startup ecosystem to support the startups.
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WITHDRAW FROM PARTNERSHIP FIRM CA MANISH

How to Withdraw from a Partnership in India

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Starting a new business with a partner is exciting, isn’t it? But, as seen at times, things do not always quite go as expected. Any of the partners, voluntarily or involuntarily, may decide to call it a day and decide to withdraw from the partnership. As a result, all partners in a partnership business must plan ahead of time for a quick and painless exit. This will assist all parties in avoiding legal entanglements or potential conflicts.

What Is a Partnership & Partnership Firm?

In India, a partnership firm can be formed by an oral or written agreement between two or more individuals. The provisions outlined in the Indian Partnership Act of 1932 apply to such partnership firms. The partnership is defined in Section 4 of this Act as a relationship between two or more people. They agree to share the profits of a business conducted by all or any of the partners in this arrangement.

Why Is a Partnership Firm the Preferred Way of Business Formation in India?

In comparison to LLPs, registered partnership firms have a smaller annual compliance load. It is also not necessary for a partnership firm to hire an auditor. Additionally, it is also not necessary to file annual accounts with the RoC if the firm is in the process of being registered. And most importantly partnership firms are exempt from filing GST and other taxes based on certain turnover thresholds.

Ways in Which a Partner Can Withdraw from a Partnership

There are two manners of withdrawing from a partnership:

  1. Voluntary withdrawal of partnership – In this type of withdrawal, a partner cites personal reasons (like retirement or lack of motivation etc) to withdraw from the partnership.  Here, he agrees to give up his share of business voluntarily.
  2. Non-Voluntary withdrawal of partnership – If for some reason, a partner is forced to withdraw his partnership in the business, it is called a non-voluntary withdrawal. Here, the withdrawal of partnership happens without the consent of the concerned partner. Such a situation arises in the event of the demise of the partner, when he becomes incapacitated or if he has been imprisoned for a crime. Other examples of involuntary withdrawal may include critical illness, bankruptcy or breach of trust/partnership duties.

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Points to Consider While Deciding how to Withdraw Form a Partnership

Prepare a withdrawal letter or notice

The complexity of a partnership withdrawal process depends on factors such as the structure, size, and success of the business.

In the case of a general partnership business, the partners participate in day-to-day business operations. They are also jointly accountable for the debts occurring in the business. In such a business, you can simply write a withdrawal from partnership letter, if you want to withdraw your partnership. This letter will serve as a notice of intimation to your other partner (s) regarding your impending exit. The notice must mention the date from which the withdrawal will be effective.

Review the Partnership Agreement

There are partnerships that involve complex assets. In such cases, you should review the partnership agreement/partnership deed to weigh your options while withdrawing from the partnership. 

Moreover, you and your partners must have addressed concerns like dissolution, transfer of interest, and withdrawal in the agreement/deed. Before formulating your withdrawal strategy, make sure you thoroughly review the agreement’s withdrawal clauses.

The deed may also specify a prohibition period before the expiry of which, no partner would be allowed to withdraw. It may also mention a time frame within which you need to serve an advance notice regarding the withdrawal to your partners. 

A review of such terms is important because if you break any of the agreement’s provisions, you may be held financially responsible for any damage you may have caused to your partners or the firm.

Distribution of Profits and Business Assets

Proper distribution of profits and business assets after a partner leaves is another important part of the withdrawal process. Terms of such distribution are usually mentioned in the partnership deed/agreement.

If the partnership does not dissolve after a partner withdraws, the assets can be allocated according to the profit and loss ratios specified in the partnership agreement. It can also be divided based on the partners’ original capital contributions to the company (termed as their individual capital accounts).

If the business is not dissolved on the exit of a partner, the partner can also decide to sell his/ her shares to the remaining partners. The existing partner may also choose to assign his/ her interest to any third party partner.

For more complex withdrawal scenarios, we would advise you to engage the legal help of the experts at camanishmishra 

Seasoned Chartered Accountant with over 15 years of industry experience. As a Virtual CFO and Startup Advisor, I'm passionate about supporting startups and small businesses on their journey to success. With a dedicated team by my side, we offer simple and practical financial advice to help you achieve your goals. Virtual CFO | Startup Advisory | NBFC & FinTech I Building Startup ecosystem to support the startups.
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