Thursday, March 5, 2009



A partnership is a business entity having two or more owners. Earnings are distributed according to the partnership agreement and are treated as personal income for tax purposes. Thus, like the sole proprietorship, the partnership is simply a conduit for directing income to its partners. Partnership has a unique liability situation. Each partner is jointly and severally liable. Thus, a damaged party can pursue a single partner or any number of partners- and that claim may or may not be proportional to the invested capital of the partners or the distribution of the earnings. This means that if the one partner did something to damage a customer, that customer could sue all the partners even though other partner played no part in the problem.

Organizing a partnership is not as effortless as with a sole proprietorship. The partners must determine, and should set down in writing, their agreement on a number of issues:

The amount and nature of their respective capital contributions (e.g., one partner might contribute cash, another a patent, and a third property and cash)

How the business’s profits and losses will be allocated

Salaries and draws against profits

Management responsibilities

The consequences of withdrawal, retirement, disability, or the death of a partner

The means of dissolution and liquidation of the partnership


Partnerships have many of the same advantages of the sole proprietorship, along with others:

· Except for the time and the legal cost of crafting a partnership agreement, it is easy to establish.

· Because there is more than one owner, the entity has more than one pool of capital to tap in financing the business and its operations.

· Profits from the business flow directly to the partners personal tax returns; they are not subject to a second level of taxation.

· The entity can draw on the judgment and management of more than one person. In the best cases, the partners will have complementary skills.

. The Partners Can withdraw profits from the business in the Name of Interest on Capital and Salary but subject to certain limits.

The Registration of the Partnership is optional


As mentioned earlier, partners are jointly and severally liable for the actions of the other partners. Thus, one partner can put other partners at risk without their knowledge or consent. Other disadvantages include the following:

· Profits must be shared among the partners.

· With two or more partners being privy to decisions, decision making may de slower and more difficult than in a sole proprietorship. Disputes can tie the partnership in knots.

· As with a sole proprietorship, the cost of some employee benefits may not be deductible from income taxation.

Depending on the partnership agreement, the partnership may have a limited life. Unless otherwise specified, it will end upon the withdrawal or death of any partner.

The Partnership firm is not a separate legal entity. Meaning Assets cannot be purchased in the name of the Partnership firm.

There are certain limits for withdrawals such as Interest on Capital & Salary to partners. Tax has to be paid if the amount paid exceeds these limits.

Tax Rates for a Partnership Firm

Income of the Partnership firm is chargeable @ 30% flat.

Surcharge is applicable @ 10% for firms having total income exceeding Rs.1 Crore

Educational Cess @ 3% is also applicable for all firms.

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