Types of Partnerships, Returns Applicable for Partnership Firm

A partnership refers to a legal and business relationship between two or more individuals who share the ownership and management of a company. Partnerships are a form of business structure in which the partners contribute capital, share in the profits and losses, and participate in the decision-making processes of the business.

Characteristic of a Partnership

The key characteristics of a partnership are:

• Agreement or Contract: Partnership arises from an agreement between two or more individuals.
• Minimum and Maximum Number of Partners: A partnership requires a minimum of two partners. There is a constraint on the maximum number of partners.
• Common Goal: Partners share a common goal or purpose in the business.
• Sharing of Gains and Losses: Partners agree to share both profits and losses of the business.
• Business Activity and Profit Motive: The partnership must engage in some form of business activity with the intent of making a profit.
• Ownership and Agency: Partners are both owners and agents of the firm. Actions of one partner can affect others and the business as a whole.
• Unlimited Liability: Each partner has unlimited personal liability for the debts and obligations of the partnership.
• Restrictions on Transfer of Interest: Partners cannot freely transfer their interest in the partnership without the consent of other partners.
• Strict Rules for Changes in Partnership: Inclusion or retirement of partners and any changes in ownership require the consent of all involved parties.
• Collective Responsibility for Liabilities: In general partnerships, all partners are collectively responsible for the firm's debts, risking personal assets if necessary.

Type of partnership

General Partnership

A general partnership is a form of business organization where two or more individuals manage and operate a business in accordance with the terms and objectives set out in a Partnership Deed. In a general partnership, each partner shares equally in the organization's profits and losses, and each partner is personally liable for the debts and obligations of the business.

Limited Partnership

In a Limited Partnership, there are both general and limited partners. The general partner has unlimited liability, manages the business, and is responsible for the other limited partners. Limited partners, on the other hand, have limited control and are not involved in day-to-day operations. They typically invest and share in profits but lack decision-making authority. Limited partners may not offset partnership losses on their income tax return due to their non-involvement in management. This structure allows for a division of management responsibilities and risk among partners.

Limited Liability Partnership

In a Limited Liability Partnership (LLP), partners enjoy limited liability, meaning they are not personally responsible for the legal and financial obligations of the firm. This protection is similar to that of a Limited Partner in a Limited Partnership, but LLP partners are distinct entities. 

Partnership at Will

A Partnership at Will is a type of partnership formed without specifying a definite period or purpose. It continues indefinitely and can be dissolved at any time by any partner giving notice of their intention to leave. This partnership structure is based on the will of the partners, allowing them the flexibility to dissolve the partnership whenever they choose. Typically established for lawful and ongoing business activities, it lacks a predetermined endpoint, giving partners the freedom to determine the duration based on their mutual agreement or individual decisions.

Returns Applicable for Partnership Firm

ITR-4 (SUGAM)

This return is applicable for Individuals, Hindu Undivided Families (HUFs), and Firms (other than Limited Liability Partnerships or LLPs).

• The individual or HUF should be a resident other than not ordinarily resident. The firm should be a resident.
• The entity should have a total income up to ₹50 lakh.
• This return is suitable for entities with income from business or profession computed on a presumptive basis under sections 44AD, 44ADA, or 44AE of the Income Tax Act. Additionally, it is applicable if the entity has income from one house property, other sources (such as interest, family pension, dividends, etc.), and agricultural income up to ₹5,000.

ITR-5

This return is applicable to a person being a:

• Firm
• Limited Liability Partnership (LLP)
• Association of Persons (AOP)
• Body of Individuals (BOI)
• Artificial Juridical Person (AJP) referred to in clause (vii) of Section 2(31)
• Local Authority referred to in clause (vi) of Section 2(31)
• Representative Assessee referred to in Section 160(1)(iii) or (iv)
• Cooperative Society
• Society Registered under Societies Registration Act, 1860 or under any other law of any State
• Trust other than Trusts eligible to file Form ITR-7
• Estate of Deceased Person
• Estate of an Insolvent
• Business Trust referred to in Section 139(4E) and Investment Fund referred to in Section 139(4F)