Legal Matters

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When is it advisable to form a partnership?

Every start-up goes through the perennial dilemma – how do I get my business up and running? Do I form a private limited company? Do I form a partnership? Do I form a limited liability partnership?

These are intricate and difficult to answer questions. It depends on the facts and circumstances of your case. But a few golden rules can be laid down.

Starting a partnership is ideal when you have less initial capital and want to start quickly. For instance, if you are a group of four friends and want to start a small business specialising in online marketing, starting a partnership is sensible.

You can actually get started for under Rs 4,000, including all costs. (Unless you decide to register your partnership agreement, in which case the costs might go up. Registration is not mandatory and can be avoided.)

So what do I need to do to start a partnership business?

First and foremost, you need to have a Partnership Agreement in place. This is the most expensive part of the process as well as the most tricky. It is strongly recommended that you speak to a professional lawyer before you prepare your partnership agreement.

This agreement should contain the following –

i. A name for your business,

ii. Office address of your business,

iii. The name, age, father's name and address of the partners in your business,

iv. The business which you will be involved in,

v. The period for which your partnership business will be active

vi. What you will do in case there is a dispute between the partners

vii. What you will do in case the partnership dissolves

When should I not start a partnership?

There are a few occasions when it does not make sense to form a partnership. For instance, with capital intensive businesses or technology intensive businesses, it makes most sense to incorporate a private limited company.

Why? Because in a partnership, the liability of the partners is unlimited – and if your business is capital intensive, you will be exposing yourself to high levels of liability if you form a partnership.

Additionally, a partnership is relatively easier to dissolve – when a partner retires or dies, the entire partnership may get affected. A company as a legal structure may be more stable for capital or technology intensive businesses.

Be careful while preparing a Partnership Agreement…

Have a look at the clauses above. Just one glance will tell you that you have to choose the clauses very carefully. For instance, what will you do in case there is a dispute between the partners?

It would mark the end of your partnership if your dispute were to go to Court. A Court dispute in India is usually so acrimonious and time consuming that the Partnership will never recover.

Therefore, we recommend that you opt for mediation or arbitration or both before you go to Court. It is best to start with mediation – (Arbitration in India is almost as expensive and time consuming as a Court proceeding).

Mediation will help you attempt reconciliation – and if it succeeds, your partnership can be nursed back to health.

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