Understanding the Difference between “Sole-Proprietary and Partnership form of Business

Partnership Account:

Partnership firms can be started where the number of partners is more than two but less than twenty. Each of these partners is the owner of the enterprise. The relationship is usually governed by an official written document known as partnership deed. It is a legal business entity owned by all the partners who jointly own the assets/ liabilities.

However, the shares of each partner are clearly spelt out in the partnership deed. The managing partner/partners so mentioned in the partnership deed is/are authorized to transact on behalf of the firm and it is binding on all the members of the firm.

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These entities are governed by the provisions of the Indian Partnership Act. It is desirable to get the partnership deed registered with the Registrar of Firms or such other authorities prescribed.

The taxation structure is fairly reasonable: While calculating taxable income of the partnership concerns, the various payments made by the partnership concern to the partners (viz., salaries, bonus, commission, interest on capital, etc.) are considered as allowable expenditure, at least partially. However, these are taxed in the hands of the individual partner.

However, this form of organization also does not have any better legal status than the proprietary concern. It also gets dissolved in the event of retirement or death of any partner calling for reconstitution of the firm.

This would mean that the existing account has to be closed and new account has to be opened in bank’s Books of Account and all the limits have to be de novo examined and sanctioned after conducting due diligence of the new partners who joined and/or the ability of the reconstituted firm to discharge the liabilities of the firm.

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