Creation of a Partnership Firm | A complete guide
Suppose you want to establish a business with your friends; maybe you are professionals of a certain branch or each of you is experts on your own tread, so you want to associate with each other but the question is, “how law is going to recognize your enterprise?” No problem, Law has the answer for your problem. You may form a partnership firm under The Partnership Act, 1932
What is a partnership Firm?
According to Section 4 of the Partnership Act, 1932; “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It also added, Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm“, and the name under which their business is carried on is called the “firm name”.
Let’s bring an example  for ease of understanding, Rohim wants to establish a restaurant, because he has long experience with restaurant management but he doesn’t have the place or the money to start such business, he shared his idea with Ahmed who has an abandoned land beside the main road of the town, Ahmed also fund the idea of restaurant business lucrative but they still lack the money they need. Then both of them went to Farhan to collect some capital, Farhan also found that plan interesting he informed the other two that he can invest money but cannot involve with any activities of the restaurant due to lack of time. Hence, they named the restaurant as “Food Zone” and decided that Rohim will maintain the catering related matters, Ahmed will handle the sales, marketing and others and Farhan will remain as a silent after investing 20 lac taka. They will share the profit (as well as the loss) 30%, 40% and 30% accordingly.
In this example, “Food Zone” is a partnership Firm and Rohim, Ahmend and Farhan are the partners of the firm.
If we observe closely, here by creating this partnership they easily achieved their goal to establish the restaurant, shared their resources, expertise and capital. Furthermore, accordingly, they are sharing the responsibility as well as profit and loss.
Now you may think, that’s great but we can also do our business with oral contract and what’s wrong with that? To answer that question let’s bring a second example with the first one. Imagine Rohim, Ahmed and Farhan are running the Food Zone Restaurant without any partnership deed/ registration. As Ahmed is entrusted with cash and credit he made some vague transaction for his own profit, In that case, other partners can find themselves in a vulnerable position as there is no written document of their partnership or any other legal document.
Let’s have another scenario [3rd example] where Rohim purchased a certain amount of goods for the restaurant and requested the other businessman to keep these dues in his register book and he along with partners will pay it within 30 days, but both Ahmed and Farhan refused to pay the due. In that chase as the partnership is not registered or recognized as a firm Rohim might be held liable to pay all the dues by himself.
So there are many pros of having a registered partnership and some corns as well. A general overview will help us to understand the essence of partnership and you will have an idea why you would like to establish a partnership firm instead of proprietor business or a company.
Some important elements of partnership law that you should know
- Relation of partnership: The relation of partnership arises from a contract (Deed of partnership) and not from status; (Section 5)
- That means if you openly consider someone your partner but there his no partnership contract between you and him you are not partners.
- The mere share of profit due to some job or action does not include anyone as partner, suppose you share 10% or your profit with your employee who is a salesman in your business, that does not make him a partner. Sharing of profit is one of the criteria but not the only one.
- The members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business.
- Business: The meaning of business in the Act means and includes Trade, Occupation, Profession but it must be remembered a single transaction or action is not a partnership. Let’s say Rayhan and Rohim jointly brought a piece of land and construct a building on it, then they split the rent of the building; here though the undertaking is huge but the task is one, the nature of the business must be running. So, it could be a partnership business if Rayhan and Rohim would continue undertaking such development business one after another. (Section 6)
- Number of Partners: The minimum number of a partnership firm would be 2(two) and the maximum would be 50 (fifty).
- Persons: Person include both natural person (Human) and legal person (I.e company, organization etc.)
- Type of partnership: Partnership could the three type
- For a specific period of time. For example, a seasonal business
- For a project. For example, to complete an event or a film production etc.
- Partnership at will (no time or project mentioned). This is the most common one, similar to our first example
- Three roles: In a partnership business a partner along with his role of partner maintain two other relation with each other, they are; Principal and Agent role, that means every partner is a principal and agent of others and for once fault others will be also liable.
- Joint Liability: Partners will jointly make decision and shall be jointly liable for action. That means a third party claim on anything that is done by any of the partners all of the partners will be liable as the same. Partners will be jointly liable for any deed that is done according to the partnership deed or generally to run the business. (Section 26)
- Individual Liability: A partner will be individually liable for his actions when he has done anything negligently or for his self-benefit, these extraordinary actions will not be covered by the partners. (section 27) Also, the person liable can be made liable by the partners. (section 52)
Please find the law here: The Partnership Act, 1932
Regarding registration of a partnership firm
To get the fruits of a partnership [firm] some legal proceedings and approval of the government is necessary. The registration of a partnership firm is undertaken by Office of the Registrar of Joint Stock Companies and Firms (RJSC) this office is under the supervision of the Ministry of Commerce.
Here is how a partnership firm can be created in Bangladesh.
- Before you take the first step the name of your firm must be decided then it must be checked at the following link: http://app.roc.gov.bd:7781/psp/nc_search?p_user_id=if you found that the name is clear to go [not used/registered by other] then you have to create an account and get a record that the name is cleared. After that, you have to pay an amount to bank according to their direction to reserve that name for you.
- Then you with the confirmation of the name you have to create a Deed of Partnership specifying the particulars of your business [more discussed later]
- The Deed of partnership must be written on the non-judicial stamp valued 2000 taka.
- The Deed must be Notarized from a Notary Public (Advocate)
- Then you have to pay an amount to RJSC to register your firm
- After paying that, you have to submit the following document
- Copy of the Deed of Agreement
- NID of Partners
- Photos of Partners
- Name Clarence document
- Payment documents for registration
- Any other document that is required for your business [depends on the type of your business]
Deed of Partnership
Deed of partnership is the single most important document for your business. I will contain all the necessary terms and conditions of your partnership deed clearly mentioning shares, risks, liability, duties etc. It is very important to create the deed carefully, the creator of the deed (the lawyer) must be skilled and experienced on business law otherwise he may miss various important points. It is better to be advised and settle the terms and conditions among the partners with the help of a lawyer.
It will also include the following particulars.
- Name and address of the firm.
- Names and addresses of the partners.
- The type and nature of the business of the firm.
- Amount of capital, Interest on Capital, Drawings, Interest on Drawings.
- Profit sharing ratio.
- Salary of partner
- The accounting period of the firm
- Methods of recording of firm’s account and safe custody of books of account of the firm.
- Auditing rules.
- Date of commencement of partnership & Duration of partnership and the modes of its dissolution. [if needed]
- Bank Accounts rules.
- Rules to be followed in case of admission of a new partner or death of a partner.
- Dispute settlement
- Rules about meeting, Bylaws etc.
Want to see an example? See this link: Deed of Partnership (Example)
Costs & Time
Costs always vary on various circumstances but I may try to provide you a general idea of the budget you need before you proceed with your next big idea.
- Name Clearance fee – 100 – 500 taka
- Deed of Partnership by an expert advocate – 10,000 [around] taka
- Non Judicial stamp – 2500 – 3000 taka
- Notary fee – 2000 – 5000 taka
- Transport and others – 1000+
In total it would be better to budget at list 16,000 taka.
Generally, it will take around 7 (seven) days to provide a digital certificate as proof of your registration. You can do all your legal activities like opening a bank account, get TIN, provide taxes etc with that digital certificate.
A partnership firm is a very suitable idea to start a business that requires joint effort and a minimum investment. If the partners became honest with their duties and irresponsibly it might be a matter of time to succeed if they succeed they can easily expand their business in the same form or by forming a company. However, if things go wrong and the enterprise fails it is also very easy to end their partnership without much hassle. Therefore, the partnership is a good and easy choice to consider for your potential or growing business.
Don’t forget to know us at [email protected] if you need expert and professional help.