Partnership Firm

A partnership is an agreement between partners where profits and losses are shared.

The partner in an LLP cannot be held accountable for any misconduct or negligence of another partner. In addition, LLPs offer liability protection to owners from the debts of the LLPs.

• LLP: Partners' liability is limited to the amount of their contribution to the LLP. In addition, one Partner is not held responsible for the actions of another Partner.
• Partnership: A partnership's liability is unlimited and can extend to the assets of the individual partners. The actions of an active Partner may hold another liable.
• LLP: LLPs must comply with statutory requirements in addition to the Income Tax Act, as the LLP Act mandates the same. The compliances ensure that the entity's financial and operational information is transparent.

When You Should Register a Partnership Firm

When You Should NOT Register an LLP

1. Annual Filing Compliances:

   Registered partnership firms must maintain basic records and adhere to annual compliance requirements, such as:

   • Maintenance of Books of Accounts

     Proper records of income, expenses, and transactions must be maintained for taxation and auditing purposes.

   • Filing Income Tax Returns (ITR)

     Partnership firms must file their annual income tax returns, irrespective of their income or profit levels, using Form ITR-5.

   • Audit Requirements
     • For firms with a turnover exceeding ₹1 crore (for businesses) or ₹50 lakh (for professionals), a tax audit is mandatory under Section 44AB of the Income Tax Act.
     • If income is declared under the presumptive taxation scheme, tax audits may not be required unless certain thresholds are crossed.

2. Compliance for Registered Firms

   Registered firms must comply with additional requirements under the Indian Partnership Act, 1932:

   • Changes in Firm Details

     Any change in the partnership deed, such as the addition or removal of partners, or a change in the firm’s name or address, must be intimated to the Registrar of Firms.

   • Annual Return Filing (If applicable)

     Registered firms may need to submit an annual return detailing their activities to the Registrar of Firms in certain states.

3. Employee-Related Compliance

   If the firm employs workers, it must comply with labor laws such as:

   • Provident Fund (PF) Contributions

     Required if the firm has more than 20 employees.

   • Employee State Insurance (ESI)

     Mandatory if the firm employs more than 10 employees earning less than ₹21,000 per month.

   • Professional Tax

     Firms must deduct and remit professional tax for employees in applicable states.

1. Income Tax for Partnership Firms

   Partnership firms are treated as separate taxable entities under the Income Tax Act, 1961. Here’s a breakdown of their tax treatment:

   • Flat Tax Rate: The income of a partnership firm is taxed at a flat rate of 30%.
   • Surcharge: An additional 12% surcharge is levied if the total income exceeds ₹1 crore.
   • Health and Education Cess: A 4% cess is applied on the total tax, including the surcharge.

2. Tax Deductions for Firms

   Certain expenses are allowed as deductions to reduce taxable income:

   • Remuneration to Partners
     Salaries, commissions, or bonuses paid to partners are deductible, provided they comply with the limits under Section 40(b):
     • On the first ₹3 lakh of book profits: 90% or ₹1.5 lakh (whichever is higher).
     • On remaining book profits: 60%.
   • Interest on Capital
     Interest paid to partners on their capital contributions is deductible, capped at 12% per annum.
   • Business Expenses
     Rent, salaries, utilities, depreciation, and other operational expenses incurred for business purposes are fully deductible.

3. Tax Audit

   A tax audit is mandatory if:

   • Turnover exceeds ₹1 crore (business) or ₹50 lakh (profession).
   • Presumptive taxation is not adopted under Section 44AD/44ADA.

4. Presumptive Taxation Scheme

   Under Sections 44AD and 44ADA, partnership firms engaged in small businesses or professions can benefit from simplified taxation:

   • For Businesses (44AD)
     Declare 8% of turnover as taxable income (6% for digital transactions). Applicable if turnover is less than ₹2 crore.
   • For Professionals (44ADA)
     Declare 50% of gross receipts as taxable income. Applicable if gross receipts are less than ₹50 lakh.
   • Firms opting for presumptive taxation are exempt from maintaining detailed books or undergoing audits.

5. GST and Indirect Tax

   If the firm is registered under GST, it must:

   • Charge GST on taxable supplies.
   • Claim Input Tax Credit (ITC) for GST paid on purchases.
   • File regular GST returns.

6. Advance Tax

   If the total tax liability exceeds ₹10,000 in a financial year, the firm must pay advance tax in four installments:

   • 15% by June 15.
   • 45% by September 15.
   • 75% by December 15.
   • 100% by March 15.