PARTNERSHIP FIRM ESTABLISHMENT

Published By The Daily Star on January 30, 2010 (Link Above)

This week your advocate is Barrister Omar Khan Joy of the Supreme Court of Bangladesh and Head of ‘The Legal Counsel’. His professional interests include commercial law, corporate law, family law, land law, constitutional law, banking law, arbitration and intellectual property laws. Our civil and criminal law experts from reputed law chambers will provide the legal summary advice.

Reader’s query
We, three friends, want to run a partnership business. What legal formalities should we fulfill first? Should we get it registered? If so, from where?
Rubel, Dhaka

Response
Thank you very much for asking us to provide a possible solution to your legal query. We have disappointedly found that many entrepreneurs start their businesses without knowing the legal procedures for doing the same and as a result after starting their ventures they regularly face numerous problems. Therefore, I must and I do appreciate your eagerness to know about the appropriate legal course of actions in this regard. It has been understood that you along with two of your friends are desirous to do some businesses by way of establishing a partnership firm. ‘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. Habitually, not all the partners get involved into the management and hence one of the partners acts as the managing partner.

In order to start a partnership concern, first of all, you need to fix and finalize the understanding amongst you and your friends. It is possible that different friends give different considerations/inputs towards forming the capital of the partnership. After finalizing the understandings, you have to reduce the same into writing in the form on a ‘partnership agreement’. Assuming that the capital of the partnership is more than Taka five thousand, as per the provision of the Stamp Act, the said agreement has to be executed in non-judicial stamp paper of Taka one thousand. This agreement will be treated as the constitution of the partnership firm and all activities, business, management and financial distribution has to be done in accordance with and/or in the light of the said partnership agreement. Accordingly, the agreement shall cover, amongst others, the name and principal place of business of the partnership firm, date of the agreement, full permanent addresses of the partners, duration of the firm, capital contribution by the partners, shares of each partner in the profit and loss, responsibilities of the partners, management of the partnership firm, dissolution procedure and consequent effects, retirement/change/addition of partners, agreement signing and banking authority etc.

After entering into the agreement, as per the provisions of the Partnership Act you are advised to register the said agreement from the office of Register of Firms. Please note, however, that unlike a company, registration of the firm will not make the firm a legal entity. Thus the partnership firm itself will not be able to enter into any agreement or file any suit in its own name. Rather it will be the partners or one of the partners, who will do these personally on behalf of the firm. Unlike a company, which itself is a legal entity, the rights and responsibilities will lie on the partners personally as opposed to the firm.

Having said the same, you may also explore an alternative, i.e. to incorporate a private company limited by shares under the Companies Act. If you do so, the company itself will be treated as a legal entity. It has been found that the external parties feel more comfortable to deal with a company as opposed to a partnership firm. However, for the companies, higher income tax rate applies. Partnerships are more suitable for simple forms of business, very easy to establish and can be operated without much of a regulatory compliance requirements. On the other hand, though companies have to comply with many legal requirements, it is suitable for a broad business structure.

Before deciding on the appropriate mode of procedure, you are advised to consult with a lawyer, who is familiar with the incorporation of companies as well of registration of firms along with expertise in tax matters. After perusal of your capital, business details and plans, number of partners, ambition for the future etc. the lawyer will be able to help you to decide on the best option for you, i.e. whether to go for a company of a partnership firm and can also complete the needful legal formalities.

Irrespective of the option, you will need to obtain trade license after registration and also need to do the VAT registration, if applicable. I hope that the above shall help to ascertain your appropriate next course of action and to start the operation of your intended business.

For detailed query contact omar@legalcounselbd.com