Partnership firm is a popular choice among entrepreneurs due to its simplicity and flexibility. It allows multiple individuals to come together and combine their resources, skills, and expertise to run a business. Registering your partnership firm is the first step towards formalizing your partnership and ensuring its legal recognition.
A partnership firm is one of the most important forms of a business organization. It is a popular form of business structure in India. A minimum of two persons are required to establish a partnership firm. A partnership firm is where two or more persons come together to establish a business and divide its profits amongst themselves in the agreed ratio. The partnership business includes any kind of trade, occupation and profession.
The Indian Partnership Act, 1932 governs and regulates partnership firms in India. The persons who come together to form the partnership firm are knowns as partners. The partnership firm is constituted under a contract between the partners. The contract between the partners is known as a partnership deed which regulates the relationship among the partners and also between the partners and the partnership firm.
Partnership Firms
A partnership stands as one of the fundamental structures for conducting business. It materializes when two or more individuals collaborate to establish a business venture, sharing profits according to an agreed-upon ratio. This form of business encompasses a broad spectrum of trades, occupations, and professions. A notable advantage is that partnership firms entail relatively fewer regulatory requirements than companies.
In India, the operation of partnership firms is governed by the Indian Partnership Act of 1932. Those who unite to create a partnership firm are referred to as partners, and the formation of the partnership firm is based on a contractual agreement among these individuals. The agreement among partners is commonly referred to as a “partnership deed.”
A partnership deed is a legal document that outlines the terms and conditions of a partnership. It includes details such as the rights and duties of partners, the distribution of profits, individual capital contributions, and the partnership’s duration.
This document is significant as it helps prevent misunderstandings and conflicts among partners by clearly defining their roles and responsibilities. Moreover, it serves as proof of the partnership’s existence and can be used in legal proceedings to resolve disputes.
Partnership registration involves the formal registration of a partnership firm by its partners with the Registrar of Firms. This process typically occurs in the state where the firm is located. It’s important to note that partnership firm registration is not mandatory; it’s optional. Partners can choose to apply for partnership deed registration at the time of forming the firm or later during its ongoing operations.
For partnership deed registration to take place, two or more individuals must come together as partners, agree on a firm name, and create a partnership deed.
Advantages of Partnership Firm
Easy to Incorporate
The incorporation of a partnership firm is easy as compared to the other forms of business organisations. The partnership firm can be incorporated by drafting the partnership deed and entering into the partnership agreement. Apart from the partnership deed, no other documents are required. It need not even be registered with the Registrar of Firms. A partnership firm can be incorporated and registered at a later date as registration is voluntary and not mandatory.
Less Compliances
The partnership firm has to adhere to very few compliances as compared to a company or LLP. The partners do not need a Digital Signature Certificate (DSC), Director Identification Number (DIN), which is required for the company directors or designated partners of an LLP. The partners can introduce any changes in the business easily. They do have legal restrictions on their activities. It is cost-effective, and the registration process is cheaper compared to a company or LLP. The dissolution of the partnership firm is easy and does not involve many legal formalities.
Quick Decision
The decision-making process in a partnership firm is quick as there is no difference between ownership and management. All the decisions are taken by the partners together, and they can be implemented immediately. The partners have wide powers and activities which they can perform on behalf of the firm. They can even undertake certain transactions on behalf of the partnership firm without the consent of other partners.
Sharing of Profits and Losses
The partners share the profits and losses of the firm equally. They even have the liberty of deciding the profit and loss ratio in the partnership firm. Since the firm’s profits and turnover are dependent on their work, they have a sense of ownership and accountability. Any loss of the firm will be borne by them equally or according to the partnership deed ratio, thus reducing the burden of loss on one person or partner. They are liable jointly and severally for the activities of the firm.
Disadvantages of Partnership Firm
Unlimited Liability
The biggest disadvantage of the partnership firm is having an unlimited liability of the partners. The partners have to bear the loss of the firm out of their personal estate. Whereas in a company or LLP, the shareholders or partners have liability limited to the extent of their shares. The liability created by one partner of the partnership firm is to be borne by all the partners of the firm. If the firm’s assets are insufficient to pay the debt, then the partners will have to pay off the debt from their personal property to the creditors.
No Perpetual Succession
The partnership firm does not have perpetual succession, as in the case of a company or LLP. This means that a partnership firm will come to an end upon the death of a partner or insolvency of all the partners except one. It may also be dissolved if a partner gives notice of dissolution of the firm to the other partners. Thus, the partnership firm can come to an end at any time.
Limited Resouces
The maximum number of partners in a partnership firm is 20. There is a restriction on the number of partners, and hence the capital invested in the firm is also restricted. The capital of the firm is the sum total of the amount invested by each partner. This restricts the firm’s resources, and the partnership firm cannot take up large scale business.
Difficult to Raise Funds
Since the partnership firm does not have perpetual succession and a separate legal entity, it is difficult to raise capital. The firm does not have many options for raising capital and growing its business as compared to a company or LLP. As there are no strict legal compliances, people have less faith in the firm. The accounts of the firm need not be published. Thus, it is difficult to borrow funds from third parties.
Importance of Registering a Partnership Firm
- A partner can sue against any partner or the partnership firm for enforcing his rights arising from a contract against the partner or the firm. In the case of an unregistered partnership firm, partners cannot sue against the firm or other partners to enforce his right.
- The registered firm can file a suit against any third party for enforcing a right from a contract. In the case of an unregistered firm, it cannot file a suit against any third party to enforce a right. However, any third party can file a suit against the unregistered firm.
- The registered firm can claim set-off or other proceedings to enforce a right arising from a contract. The unregistered firm cannot claim set off in any proceedings against it.
Who Can Be a Partner in India's Partnership Firms?
Documents for Registration of Partnership
- Application for registration of partnership (Form 1)
- Certified original copy of Partnership Deed.
- Specimen of an affidavit certifying all the details mentioned in the partnership deed and documents are correct.
- PAN card and address proof of the partners.
- PAN card and address of the firm.
- Proof of principal place of business of the firm (ownership documents or rental/lease agreement).
Partnership Deed
Details Required in a Partnership Deed
General details
- Name and address of the firm and all the partners.
- Nature of business.
- Date of starting of business Capital to be contributed by each partner.
- Capital to be contributed by each partner.
- Profit/loss sharing ratio among the partners.
Specific details
Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a later stage:
- Interest on capital invested, drawings by partners or any loans provided by partners to the firm.
- Salaries, commissions or any other amount to be payable to partners.
- Rights of each partner, including additional rights to be enjoyed by the active partners.
- Duties and obligations of all partners.
- Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of the firm.
- Other clauses as partners may decide by mutual discussion.
Procedure for Partnership Firm Registration
Obtain a Digital Signature Certificate (DSC)
Obtain a DSC for all partners. This electronic signature is necessary for online document signing and can be acquired from a certified agency.
Obtain a Designated Partner Identification Number (DPIN)
After securing the DSC, partners must apply for a unique DPIN. This identification number is required for all partners and can be obtained through the MCA website.
Choose a Name for the Partnership Firm
Select a unique name for the partnership firm, ensuring it is not identical or similar to any existing company or LLP. It must also comply with legal naming regulations.
Draft the Partnership Deed
Create a comprehensive partnership deed outlining the terms and conditions of the partnership. This document should include the firm’s name, partner names and addresses, business nature, profit-sharing ratio, and the partnership’s duration.
Application for Registration
Partners must apply with the Registrar of Firms, including firm details, partners’ names and addresses, and the duration of the firm.
Obtain the Certificate of Registration
Following verification by the Registrar of Firms, If the Registrar is satisfied with the application, a Certificate of Registration will be issued to confirm the partnership deed registration. This certificate proves the firm’s registration with the Registrar of Firms.
Apply for PAN and TAN
Apply for a Permanent Account Number (PAN) and a Tax Deduction and Collection Account Number (TAN) from the Income Tax Department. These numbers are essential for tax-related matters.
FAQs
What is the scope of liability of partners in a partnership firm?
Every partner is jointly liable with all the other partners and also individually, for all acts/activities of the firm, during the course of business while he/she is a partner. This means that if a loss or injury is caused to any third party or a penalty is levied during the course of business all partners will be held liable even if the injury or loss was caused by one of the partners.
Can a partnership registration certificate be cancelled?
A partnership certification of incorporation is revoked when the firm is dissolved. A dissolution can be brought upon automatically when all partners or all partners except one partner are declared insolvent or if the firm is carrying unlawful activities, i.e. like trading in drugs or other illegal products, corporate malpractice or making business engagements with countries that may harm the interest of India.