Types and formation of partnerships

Sources of partnership law

What is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?

In India, partnerships are governed by the Indian Partnership Act 1932 (the Act). Limited liability partnerships (LLPs) are governed by the Limited Liability Partnership Act 2008 (the LLP Act). In an LLP, the partners have limited liability, whereas in a partnership the liability of the partners is unlimited. There is no overlap between the provisions of the Act and the LLP Act.

An LLP is a separate legal entity distinct from its partners, and all partners in an LLP have limited liability, such as in the case of a company.

Types of partnerships

Identify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?

In terms of the Act, there are primarily two types of partnerships in India: ‘partnership at will’ and ‘particular partnership’. A partnership at will is made through a contract between the partners where the duration of their partnership is not determined; a particular partnership is where a person may become a partner with another person in a particular undertaking.

Further, LLPs are typically used when the partners or persons want a balance of management control with reduced liability exposure.

Differences between types of partnership

What are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?

In terms of the Act, partners in a partnership firm have unlimited liability: each partner is liable jointly and severally with all other partners for all acts of the firm performed while he or she is a partner. However, in terms of the LLP Act, partners have limited liability; that is, a partner is not personally liable, directly or indirectly, for an obligation of the LLP solely for being a partner of the LLP.

While a partnership firm is a body of persons, an LLP is a body corporate.

Reasons for choosing a partnership structure

What are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?

Partnerships are preferable as they are easy to set up, not requiring formalities or elaborate paperwork. Further, they provide flexibility as the terms and conditions can be easily amended, subject to the consent of the partners.

Further, with the advent of the LLP Act, LLPs have become a more popular form of structure owing to the advantage of being separate legal entities with the liability of the partners limited to the extent of capital contributed by them. LLPs have a more regulated framework with all the filings to be made online with the Ministry of Corporate Affairs (MCA), which can be viewed by the public when required.

The biggest drawback for partnerships is that the liability of the partners is unlimited; however, this was addressed with the advent of the LLP Act, with LLPs now being the preferred structure for the Indian partners. However, from a foreign direct investment (FDI) perspective, FDI is only permitted if the LLP is engaged in an activity in which 100 per cent foreign investment is permitted through the automatic route (that is, where prior approval from the government is not required) and there are no foreign investment-related performance conditions.

Formation (formalities and bars to formation)

How are partnerships and the similar structures available in your jurisdiction formed?

A partnership firm is formed through a partnership deed that details all the requisites of the partnership, such as the rights and obligations of each partner, capital contribution, place and type of business. The Act is silent as to whether a partnership can exist by oral agreement, but as per the provisions of the LLP Act, an LLP agreement should be in writing and must be filed with the MCA.

Any person can be a partner of a firm. Further, it may be registered at the option of the partners. The benefits of registering a partnership firm are as follows:

  • the firm can file a suit against a third party;
  • a partner can file a suit against other partners of the firm;
  • the firm can file a suit against any partner; and
  • a partner can file a suit to enforce against the firm a right arising from the contract or conferred by the Act.

However, in an LLP, at least two designated partners are required, out of which at least one designated partner should be a resident in India (ie, a person who has resided in India for 182 days in the preceding calendar year). If a designated partner is a body corporate or company it can act only through its nominee. An LLP is governed by the LLP agreement. In the absence of an LLP agreement, the mutual rights and duties of the partners are determined in the manner prescribed under the LLP Act. Every LLP is required to be registered with the Ministry of Corporate Affairs (MCA).

A partnership firm and an LLP can carry out any lawful business activity through a place of business in India.



How are partnerships taxed?

A partnership firm and an LLP are taxed at a flat rate of 30 per cent (excluding applicable surcharge and cess (tax levied for a specific purpose)) on their income. Thereafter, the share of profit that a partner takes out from the partnership firm or an LLP is exempt in the hands of the partner (including the partners based overseas, subject to double taxation avoidance agreements).

The income (other than profits) earned by a partner is assessed and taxed as if the partner is self-employed and not an employee of an organisation.

Further, a partnership firm and an LLP are required to have a permanent account number in accordance with the provisions of the Income Tax Act 1961.

Reporting and transparency requirements

To what extent must partnerships, LLPs and similar structures file accounts and other documents and information with a government agency?

An LLP is required to file an annual statement of account and solvency with the Ministry of Corporate Affairs (MCA) within 30 days from the expiry of six months after the financial year to which the statement of accounts and solvency relate, and an annual return within 60 days from the end of its financial year. Further, an audit is required only after crossing a turnover of 4 million rupees or when aggregate capital contributions by the LLP partners exceeds 2.5 million rupees.

The statement of account and solvency and the annual return of an LLP can be viewed by carrying out a public search on the website of MCA; however, the partnership agreements filed by an LLP are not available on the MCA website for public review.

The Income Tax Act 1961 provides that partnership firms and LLPs involved in a profession with gross receipts of more than 5 million rupees and those involved in doing business and having sales turnover exceeding 10 million rupees are required to have a tax audit.

The details of the partners of a registered partnership firm and an LLP are available for the public to inspect.

Ownership and membership

Can anyone be a partner, and, if not, who can and cannot? Can bodies corporate or other partnerships own a partnership?

Any individual or body corporate can become a partner provided that the individual has:

  • not been found to be of unsound mind by a court of competent jurisdiction and the finding is in force;
  • not been declared an undischarged bankrupt; or
  • not applied to be adjudicated as an insolvent and his or her application is pending.

Further, a foreign entity can be a partner in an LLP and make an investment only in sectors where 100 per cent FDI is allowed in terms of the extant FDI policy.

Execution of documents

How do partnerships and LLPs execute documents? Must all partners sign? Can the partnership or LLP sign in its own name?

Partnership firms and LLPs typically execute the documents in their own name through the partners or nominees who have been authorised in this regard, as per the agreement between the partners. Any act done by a partner as per the authority granted to such persons binds the firm and its partners.

Benefits, employment rights and partners’ duties

Remuneration and benefits

To what extent are partners free to agree how to share profits and what are the most common types of profit-sharing arrangements?

Profit-sharing is captured in the partnership deed or the LLP agreement. Partners are free to negotiate and agree on profit-sharing. The most common manner of profit-sharing is to divide the profits in the ratio of capital injection by each partner. Partners may receive retirement benefits as may be agreed between the partners.

Employment rights

To what extent are partners considered employees? Do they benefit from statutory employment rights?

A partner is not entitled to take any remuneration for taking part in the conduct of the business and making capital contribution to the firm. Partners are only entitled to a share in the profits or losses of the partnership. Further, the income earned by a partner is taxed as ‘self-employed’ and not ‘employed’ income in accordance with the provisions of the Income Tax Act 1961. In terms of the Act and the LLP Act, partners are not statutorily entitled to any retirement benefits; however, they may contractually agree to these benefits post retirement.

Partners’ duties

Is there a statutory or common law concept of good faith among partners, and what are its implications? What are typical contractual duties between partners or owed by partners to their firms?

Partners are bound to carry on the business to the greatest common advantage and to be just and faithful to each other with a view to benefit­ing the firm at large. If a partner does not act in good faith, the majority of the partners can remove such a partner from the firm.

Typically, the partners have contractual duties to:

  • take part in the management;
  • render true accounts and full information to other partners;
  • not carry on a competing business while they are partners in a firm;
  • make full disclosure of their interest, if any, with respect to a contract to be entered into by the firm; and
  • if they are ‘designated partners’, file any document, return, statement and report pursuant to the provisions of the LLP Act and as per the LLP agreement

If the aforementioned disclosure is not made, the partners have a duty to account for any benefit or profit earned from such transactions where partners have an interest.

Entering and leaving the partnership

Joining the partnership

How do prospective partners typically enter the partnership? Are there any formalities?

In terms of the Act, a partnership may be effected by way of a partnership deed, which may or may not be registered. However, it is advisable to register the partnership deed as there are various benefits (such as the right to sue the other partners as well as the firm in the case of a dispute). In terms of the LLP Act, the LLP agreement is mandatorily required to be filed with the MCA.

Section 31 of the Act provides that, subject to a contract between the partners, no person can be introduced as a partner without the consent of all existing partners. Accordingly, partners can, by way of the partnership firm, provide for induction of a new partner subject to the consent of a majority or of all the partners.

While there is no such provision in the LLP Act, item 7 of Schedule 1 provides that no person may be introduced as a partner without the consent of all existing partners. However, the proviso to Schedule 1 provides that the matters regarding rights and duties of partners as set out therein shall apply in the absence of any agreement on such matters. Accordingly, unless the LLP agreement provides otherwise consent of all partners would be required for induction of a new partner.

In terms of the Act, notice of the introduction of an incoming partner must be filed with the registrar within 90 days and, as per the LLP Act, within 30 days with the MCA along with the consent of such partner.

Leaving the partnership

Can partners leave a firm without the agreement of the other partners, and must they serve a notice period? Will a partner receive back any capital invested, a share of the value of the partnership or any other payments on leaving? In what circumstances can a partner be required to leave a firm?

A partner can leave a firm with the consent of all the partners or as agreed in the agreement. However, the LLP Act provides that in the absence of an agreement a partner can cease to be a partner by giving at least 30 days’ notice to the other partners.

A partner leaving a firm is entitled to receive the amount of capital contributed by the partner and his or her right to share in the accumulated profits after deducting the accumulated losses, if any.

Further, a partner may not be expelled from a firm by any majority of the partners, except in the exercise of good faith or powers conferred by contract between the partners.

Disputes and redress

Recovering losses caused by partners

May partners sue for loss caused by another partner?

The partners are the agents of the firm. Hence, the partnerships can sue a partner for any loss incurred due to wilful neglect or fraud of the partner and they are required to indemnify the partnerships.

In terms of the Act, the partners are jointly and severally liable for all acts of the firm. In terms of the LLP Act, if a partner has acted fraudulently without the knowledge of the LLP, then, without prejudice to any criminal proceedings that may arise under any law for the time being in force, the LLP and any such partner or designated partner is liable to pay compensation to any person (including the partners of the LLP) who has suffered any loss or damage by reason of such conduct.


How are disputes among partners and between individual partners and the partnership itself typically handled?

The LLP Act stipulates that all disputes are to be resolved through arbitration. However, the Act does not have specific provisions with respect to any resolution process. Typically, it is for the partners to decide contractually how to resolve disputes and the disputes are resolved in terms of the process mentioned in the partnership deed. The most preferred and common way of dispute resolution is through arbitration.

The most common partnership disputes relate to breach of fiduciary duties of a partner, financial disagreements, deadlock due to one partner wanting to exit within the lock-in period, enforcement of non-compete clause or failure to delineate authority.

Dissolving the partnership


How are partnerships voluntarily dissolved?

In terms of the Act, a partnership firm may be dissolved with the consent of all the partners or in accordance with the contract between the partners. In terms of the LLP Act, an LLP shall be dissolved as contractually agreed by the partners.

Update and trends

Emerging trends

Are there any emerging trends or hot topics in your jurisdiction?

No updates at this time.