Everything You Need To Know To Start a Business with a Partner | Partnership Business.

how to start a business with a partner
If you are starting a business with your partner, there are a few things you have to take care.

Entering into a partnership is a great way to collaborate talents and skills required to build a successful business. If you want to grow your business or start a business start a business to a substantial level, you need to bring partners into the business. A partnership business is straightforward to start. Sign a partnership agreement, apply for PAN and you are good to move further. However, here the caution is that each partner’s liability is unlimited also, once partner is responsible personally for actions or contracts undertaken to bother partners er(s).

7 things to look in for a business partner before you start a business.

You need to pay attention to these 7 points before you legally sign your partnership agreement. These 7 points will save your partnership from failing or preparing you to deal with changes in the future.

1. VISION OF PARTNERS – Determine upfront if the partners have the same vision for the business. For, e.g., there should not be a scenario where one partner wants to sell the business after scaling (taking business decisions based on short-term goals) versus another partner who wants to let the business continue by heirs (taking business decisions based on long term goals)

2. PARTNER’S SYNERGY – The best scenario would be that each partner contributes different strength and skill set to the business. For, e.g., if one person is good at sales and marketing and the other person is good at finance and operations, each will bring synergy to the business. I recommend drafting a job description for each partner within the firm.

3. CAPITAL CONTRIBUTION – The profit-sharing ratio for each partner will depend upon who brings how much capital to the business.

4. TIME CONTRIBUTION – What would be the amount of time contributed by each partner? If one person is putting in all the time and the other partner is bringing in the capital, you need to adjust the profit-sharing ratio to compensate each.

5. CONFLICT MANAGEMENT – Have a strategy for resolving the business conflicts. I recommend checking the history of your partner in past conflicts.

6. PARTNER’S AGREEMENT Include the points mentioned above in the agreement and sign them officially before starting your business.

7. EXIT STRATEGY Discuss with your partner what would happen if one wants to leave and preferably document this in the agreement.

Types of partnerships

The following are the 2 types of partnerships for you to choose from:

  1. Partnership Firm
  2. Limited Liability Partnership

Read this blog post till the end for a bonus tip ;)

1. Partnership Firm

To start things off the low-cost way with the partners, you can start a business as a Partnership Firm. In this blog post, you will learn how exactly you can start your business as a partnership firm and if this legal structure is optimal for you.

To start as a Partnership firm, you will need:

  • Identity proof and address proof of all the business partners.
  • The address proof of your business place.
  • The name of your business you would want.

TIP: I highly recommend checking the proposed name with a lawyer for any trademark issues. You don’t want to build the foundation of your business with a name you cannot own. I also recommend registering the website, and social media handles with the name of your business immediately.

Once the name is sorted, you all will need to decide how much capital and time each partner will invest and their profit sharing ratio and put these terms in the partnership deed. All the partners must sign the deed, and stamp duty must be paid on the deed depending on the firm’s total capital.

Once the deed is signed,

  • apply for PAN of the firm.
  • apply for Udyog Adhaar / MSME registration at this time.
  • open a bank account (current account) in the name of your business.

Tip: This is the right option for someone who wants to start a business with partners but not sure about your business’s longevity, and the volume of transactions is not big.

Refrain from being a Partnership Firm if :

  • You want to build a legacy business.
  • You are likely to have a high volume of transactions or liabilities. You all will be personally and severally liable for all the liability taken by any of the partners for business matters.
  • You want to have a better tax structure.
  • You want to have a separate legal structure apart from your partner.
  • You want to invest in other companies.
  • You want to invest in property in the name of the firm.

2. Limited Liability Partnership LLP

If you are starting your business in 2020 and want to share limited liabilities with the partners, a Limited Liability Partnership is the best option. And if you want to start your business as LLP, check out this{ADD LLP ARTICLE HERE} detailed blog post on LLP.

To start a business as LLP, you need to;

1. Determine who all will be the designated partners in the LLP.

2. Apply for their DSCs (if they don’t have them already)

3. Apply for their DIN / DPIN from MCA, a unique number for a person for being a partner in all the LLPs.

4. Apply for the name of the LLP. Search the MCA database to know if the proposed name is already taken. Also, check the name with the trademark website to avoid conflict later.

5. File form 2 for the incorporation of the LLP with MCA. MCA generally replies within 2 weeks for any questions or with the incorporation certificate.

6. File LLP Agreement within 30 days of incorporation of LLP.

7. Obtain other business licenses and open a bank account in the name of LLP.

If you are in a fix to decide whether to start your business as a partnership firm or an LLP, I have compared the two options on major criteria.

1. LIMIT ON NUMBER OF PARTNERS – A partnership firm cannot have more than 20 partners, but LLP has not such restrictions.

2. REGISTRATION – A partnership firm can be started by signing the partnership agreement. Registration is not compulsory. However, LLP needs to be registered with MCA

3. LIABILITIES – A partnership firm is not distinct from its partners; hence the liability is unlimited. Each partner is responsible equally for the actions taken by the other partner of the firm. LLP scores here as LLP is a separate legal entity, and each partner’s liability is limited to the contribution to the business.

4. TAXATION A partnership firm and LLP both are taxed similarly. The tax rate is 30% plus cess. Share of profit is tax-free in the hands of the partner.

5. COMPLIANCE LLP needs to get a statutory audit done if the turnover crosses INR 40 lakhs and file an annual return with MCA and Income Tax. A partnership firm doesn’t need a statutory audit. Tax audit is applicable for both if turnover crosses INR 1 crore / 50 lakhs for professionals

6. SUCCESSION Partnership firm dissolves if one of the 2 partners dies or resigns subject to clauses in the partnership deed. The existence of LLP is unaffected upon a change in partners.

7. CREDIBILITY – With low compliance/ regulation, no separate legal entity, and unlimited liability, a partnership firm ranks low on credibility. LLP scores are high on the same points.

BONUS TIP: If you want to run a business with partners without worrying about one partner ditching the other person in the future, LLP is a safer option. However, a partnership firm is a low-cost option to run the business with partners.

Leave a Reply