A partnership is a form of business organization, where two or more persons join together to jointly carrying on some business. It is an improvement over the 'sole-trader business', where one single individual with his own resources, skill, and effort carries on his business. Limitations caused by the sole-trader business can be overcome by forming a partnership firm where the number of persons can pool their resources, skills, and efforts to manage a large business. In return, both risks and rewards shall be shared among the partners.
Advantages
Advantages of this business structure
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Partnership firms are easier and less expensive to set up than companies.
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Partners can carry on a business under the trading (Business) name.
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Partnerships combine the resources and expertise of the people.
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Partnership firms are simpler to administer. Profits and Losses are shared between the partners according to his\her share(as specified in the partnership agreement)
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Unlike companies, partnerships do not have to disclose their profits to the public.
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Changing the legal structure is relatively simple (i.e. changing from a partnership firm to a company at a later stage.
Taxation
Provisions related to Partnership firm under Income Tax Act, 1961
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Deduction for salary and remuneration paid to working partners: Any payment of salary, bonus, commission, or remuneration or by whatever name called to any partner shall be allowed as deduction in the hands of the firm subject to such conditions and limitations specified in the Act.
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Monetary Ceiling on Salary to Partners: The amount of salary to working partners shall not exceed 90% of the book profit or Rs 1,50,000 whichever is higher on the first Rs 3,00,000 of book profit or in case of loss and at the rate of 60% of the book profit on the balance of book profit exceeding Rs 3,00,000/-.
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Deduction for Interest paid to Partners: Where a firm pays interest to any partner, the firm can claim a deduction of such interest at a maximum rate of 12% p.a. according to the partnership deed. Interest paid in excess of the above shall be disallowed in the hands of the firm.
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Rate of Tax: Firms are taxable at a flat rate 30%. Any long term capital gain shall be taxable at the rate of 20% and short term capital gains from shares\securities at the rate of 15%
Taxation
Provisions related to Partnership firm under Income Tax Act, 1961
Income from Business (Section 44AD):
Computation of income from the eligible business on a presumptive basis under section 44AD provided turnover for eligible business does not exceed Rs 2 crore subject to certain specified conditions. The presumptive income of the eligible business shall be calculated at the rate of 6% of gross receipts which is received in account payee cheque or draft or use of electronic clearing system or other electronic modes as may be notified. Or at the rate of 8% if such gross receipts are realized by way of cash.
Income from Profession (Section 44ADA):
Computation of income from the eligible profession on a presumptive basis under section 44ADA provided turnover for eligible profession does not exceed Rs 50 lakh in the previous year subject to certain specified conditions. The presumptive income of such eligible profession shall be 50% of the total gross receipts.
A partnership firm engaged in an eligible business and covered under the Presumptive taxation scheme under section 44AD and 44ADA shall not be eligible for deduction of any interest or salary/remuneration to its partners.