Can A Company Become A Partner In A Partnership Firm?

Thinking about whether a company can legally become a partner in a traditional partnership firm? The short answer is yes- a company can be a partner, but it is not as simple as signing an agreement. Since a company is a legal person and not a natural one, the process involves specific legal and procedural steps. This blog explains everything you need to know- from the legal eligibility under the Indian Partnership Act and approvals under the Companies Act, MoA/AoA, to tax treatment under the Income Tax Act. You will also learn about who cannot be a partner, the FEMA/FDI rules for foreign ownership, and when such partnerships are allowed or restricted.

Key Considerations For A Company To Become A Partner

Before a company can legally become a partner in a traditional partnership firm, it must satisfy multiple legal and regulatory conditions.
Under the General Clauses Act, a company is treated as a “person,” allowing it to enter into contracts. However, if the partnership involves any element of foreign investment, the provisions of the Foreign Exchange Management Act (FEMA) and guidelines issued by the Reserve Bank of India (RBI) must also be followed. These regulations ensure that any financial participation or capital contribution by a company, especially with foreign ownership, complies with India’s investment and foreign exchange laws.

To proceed, the company also needs internal authorization — permission under its Memorandum and Articles of Association (MoA/AoA) and a formal Board Resolution under Section 179 of the Companies Act, 2013. Think of these as the essential legal and procedural checks before a company can join a partnership.

Can A Company Be A Partner In A Partnership Firm? Here Is What The Law Says.

According to the law, the word “person” does not just mean an individual - it also includes a company or body corporate (as per the General Clauses Act). This means a company can become a partner in a partnership firm. The Indian Partnership Act defines a partnership as a relationship between “persons,” but it does not prohibit companies from being partners. So, as long as the company’s internal rules (its Memorandum and Articles of Association) and Board of Directors approve it, a company can legally join a partnership.

However, a partnership firm itself cannot be a partner because it is not a separate legal person; it is just a group name for all the partners, as clarified by the Supreme Court in the Dulichand Laxminarayan case. Courts have also confirmed that juristic persons (like companies or LLPs) can be partners, which further supports this view.

Note: A company can be a partner in a firm if properly authorised, but a partnership firm cannot be a partner in another firm. If you are evaluating structures, see the LLP overview and advantages.

When Is It Allowed vs. When Is It Restricted?

When is it Allowed?

A private or public company can become a partner with individuals or other businesses through a proper partnership deed. But before joining, the company’s Board of Directors must approve it by passing a Board Resolution (as required under Section 179 of the Companies Act). If you’re formalising the arrangement, review the steps to register a partnership firm and execute a deed.

When is it Restricted?

Some sectors have special rules. For example, banks, insurance companies, or NBFCs (non-banking finance companies) might need approval from their regulators, like the RBI or IRDAI, before entering a partnership. If there is foreign investment (like a company with foreign owners joining a firm), you must check the FDI policy and FEMA rules. These laws control how non-residents can invest in unincorporated entities (like partnership firms), and Government or RBI approval may be needed. Since rules change often, it is best to check the latest updates from DPIIT or RBI before proceeding.

Who Cannot Be a Partner in a Partnership Firm?

Not every individual or entity can legally become a partner in a partnership firm. The law restricts those who lack the capacity to contract or the legal status required to enter into a partnership.

Individuals

Individuals are primarily disqualified if they lack the capacity to contract under the law:

• Minor: A person under the age of majority (usually 18) cannot be a full partner. They may only be admitted to the profits of the firm with the consent of all existing partners.
• Person of Unsound Mind: This includes individuals like lunatics or those incapacitated from understanding the nature and consequences of the partnership agreement.
• Insolvent Person: An undischarged insolvent is legally prohibited from entering into contracts.
• Disqualified by Law: Any person who is specifically forbidden from contracting under any other relevant law.

Entities

Entities are primarily disqualified if they lack separate legal standing or are bound by non-contractual status:

• Partnership Firm: A firm itself cannot be a partner. This is because a firm is not a separate legal entity; it is simply a collective name for the partners who constitute it.Learn more about the nature of a partnership firm.
• Hindu Undivided Family (HUF): The HUF as a collective entity cannot be a partner because partnership arises from a contract, not from family status. However, the Karta or any individual member can join in their personal capacity.
• Other Entities: While a company or LLP can be a partner (as they are legal entities), they are disqualified if their own constitutional documents do not give them the express power to enter into a partnership.

FEMA/FDI Scenarios (If Any Foreign Ownership Is Involved)

If a person or company living outside India (a Non-Resident) wants to be a partner, the entire process is strictly controlled by the Foreign Exchange Management Act (FEMA).

1. Traditional Partnership Firm (Difficult Route)

• Non-Residents (NRIs/PIOs): They can invest, but it’s mostly on a non-repatriation basis. Simply put, the money (capital and profits) must largely stay in India. Taking it out is very restricted.
• Foreign Companies/Other Foreigners: They need prior approval from the Reserve Bank of India (RBI) to invest. This is the hardest and least common route.

2. Limited Liability Partnership (LLP) (Easy Route)

• The LLP is the preferred choice for foreign investors because the rules are clear. See a full primer on what an LLP is and how it works.
• Automatic Entry: Investment is allowed under the Automatic Route (no government approval needed) if the business sector is one that already allows:
• 1. 100% foreign investment.
  2. No special performance conditions are attached to the investment.

Note: If you are bringing foreign funds, the LLP is the smooth highway; the traditional Partnership Firm is a complicated back road with several checkpoints.

Tax Treatment for a Corporate Partner (What Finance Teams Should Know)?

When a company is a partner in a firm, its income is taxed differently:

• Share of Profit: The profit the company gets from the firm is tax-free under Section 10(2A) of the Income Tax Act, 1961.
• Remuneration: Only individual partners can get a salary or commission that the firm can claim as an expense under Section 40(b). Since a company cannot be a “working partner,” any payment to it is not tax-deductible for the firm.
• Interest on Capital: The firm can pay interest on the company’s capital as per Section 40(b) limits. This interest is taxable for the company as income.

Example:
If a company invests ₹10 lakh as capital and earns ₹1 lakh profit share and ₹80,000 as interest:

• ₹1 lakh (profit share) is tax-free for the company.
• ₹80,000 (interest) is taxable in the company’s hands.

Conclusion

Yes, a company can become a partner in a partnership firm in India. The underlying concept is clear: a company qualifies as a 'person' under the General Clauses Act, granting it the legal capacity to contract under the Indian Partnership Act.

However, its entry is conditional: its own charter (MoA/AoA) must permit it, the Board must pass a resolution (Companies Act, s.179), and all tax and regulatory guidelines, especially those concerning FEMA/FDI, must be scrupulously followed. Always frame this as allowed under conditions- never as a blanket statement.