New companies and start-ups have to make big decisions, while launching their dream venture. Most importantly, they have to choose the right kind of entity for their business. Whether it would be a one person company, partnership firm or a private limited company? There are numerous factors that attribute to your decision making and act as ‘effective guiding points’.
Generally, if there are two or more investors in a project and share common goals, then formulating a business partnership sound sensible. But, it is better to analyze the prospects, needs and limitations of partnership business before making any decision.
It is extremely important to choose a right business partner in a partnership entity. The selecting criterion may vary but there are few common and pertinent points that demand attention. He/she must comprehend your business ideas and possess enough knowledge to ideally contribute in the success of the business. Apart from this, one must identify the needs of business and challenges before forming a business partnership.
How partnership can be a right decision for your business?
Kinds of Partnership:-
In India, there are two kinds of partnership i.e. general or limited. Both of them have their own set of pros and cons and it depends on business owner(s) to decide the same on the basis of their circumstances as well as business requirements.
Under partnership, two or more person consent to become partners or co-owners of a firm. There is a lack of liability protection in both these forms because business entity is not considered as separate legal entity and thus, your personal assets are also on stake. In general partnership, the liability of the partner is unlimited whereas in limited liability partnership, it is limited to the extent of the contribution of each of the partner except in case of fraud or any wrongful act of commission or omission by any of the partner.
The legal structure of partnership is formed as per the process defined under Indian Partnership Act and as per the agreement signed by partners before the inception of firm. Here, all the profits and losses are shared as per the mutual terms agreed by all the partners.
Legal compliances under partnership:-
Partnership firms don’t have to sustain the pressure of stringent legal compliances. Still, LLPs are the ones who have to maintain minute books, pay corporate tax @ 30%, Alternate minimum tax and file tax returns periodically. It enhances their credibility in the eyes of bankers, lenders and investors in comparison to general partnership firms.
If you want to expand with limited number of people who have the right acumen to collaborate with you, then partnership is just the right choice. It will also help you maintain a direct relationship between the ownership and management of the business. Here, you have to share the control and management with your partners.
How partnership can be disastrous?
In most cases, partnership dissolves because partners don’t share a healthy and potential relationship. If you have any doubts about your partner with regard to his/her behavior, actions or working, then it would be wise to not enter into any partnership agreement with him/her.
- If industry is sensitive to lawsuits, then general partnership can face lots of troubles. It would be better to form a private limited company or a limited liability partnership.
The complex phase of choosing a legal structure for a business takes a lot of time in starting any company. Partnerships are formed on the pillars of trust between partners and it is better to consider aforementioned points while making the decision for your business.