5 Things to be Cautious About Before Partnership Registration

The Buyt Desk

A partnership or business cannot be dissolved easily after registering the firm. So be cautious about a few things before registering your business partnership firm.

The success of partnership ventures totally depends on the coordination among the partners. The business partnership will run smoothly when all partners play their roles properly. It becomes a little complex with many partners as all intellectual skills and monetary capital should blend in the right way. Do not fall into bad partnerships and regret them later. Be cautious with a few aspects even before initiating the process of registering the partnership firm. When there are more than 2 people, their ego, disagreement, money, time and many such factors will hinder the smooth running of the business.

What are 5 important aspects to look into before partnership registration?

1. Do not rush while choosing a partner – Think a lot and do thorough research about the partners you are going to choose. Even if he/she is your childhood friend, you need to get all details about the person from financial to personal. Only when you and your partners have similar goals, values and mindset, can you work hand in hand to generate profits with conflicts? Think twice and gauge all aspects of the partners. If you are unable to get information, get some help from agencies who will do the work for you.

2.  Try to register the Partnership at the earliest – Oral partnership is uncertain and legally you cannot hold anyone responsible if anything goes wrong. Hence registering the partnership firm at the earliest is very critical. When every rule and role is clearly written in the agreement, it gives all partners transparency and gives less scope for conflicts and confusion. Few benefits of registering a partnership deed are –

• Partners (firm) get the authority legally fight against third parties and other partners

• Gives the power to declare set-off against any third party claim

• With the registered partnership, it gets faster and simple to translate into any other business structure

A well balanced and a well-drafted partnership deed must contain

• The name of the partnership firm

• Partners’ contribution in terms of property, services and cash

• Partnership percentages

• Profit ratio of each partner

• Partner’s authority in terms of decision-making

• Partner’s management duty and individual responsibilities in running the business

• Procedure for new partner admittance

• Procedure for partner withdrawal

• Procedure for dispute resolution

3. Do consider LLP registration – Limited Liability Partnership is the best option for partnership firms. It creates a secure structure compared to the general partnership as the liabilities among the partners are kept limited. The benefits of LLP registration are

• Liability protection – A partner is not answerable for another partner’s actions.

• Tax Advantages

• Flexibility

• Better credibility

• LLP can buy assets in the firm’s name

• LLP is unaffected by the exit or death of a partner

4. Vigilantly settle on the capital distribution – Business runs on fuel known as capital. Partners can put in the capital at any stage of the partnership. The deed’s stamp duty amount is evaluated based on the capital investment made till the time of partnership registration. Every time there is a change in total capital or a partner’s contribution, an additional agreement is to be made and the same should be notified to the Registrar of firms. The partnership deed should clearly specify –

• Each partner’s initial contribution to the partnership

• Capital amount modifications

• Partners who make zero contribution

The capital investment can be in different forms like cash, tangible Assets – machinery, land, inventory, building or intangible Assets – intellectual properties, goodwill, and customers.

5. Specify the exit strategy – The partnership deed should clearly describe the exit plan. It should describe the procedure clearly including the details about the distribution of profits and the firms’ dissolution strategy. It should allow the partner to walk away easily from the partnership and also provide safer options to buy out the other partner.

Summing up

Running a partnership business will be very smooth if one is very cautious while choosing the partner and drafting the partnership deed with all clauses clearly explained. If the start is done carefully considering all pros and cons before registering a partnership, the partnership will run longer and grow faster.