This article on ‘Partnership Firm Registration in India: All you need to Know’ was written by Jagrati Gupta, an intern at Legal Upanishad.
The developments post-liberalization in 1991, even during the tenure of successive governments, were overall favourable for the rise in trade and business activities as well as growth in the private sector. Since then, a surge in entrepreneurial and innovative mindsets has been witnessed and various forms of business organization are rising. One such famous business structure is a partnership firm in which two or more persons work together as partners sharing equal or varying proportions in liabilities and profits.
What is Partnership?
The Oxford Dictionary for the Business World defines a partner as “a person who shares or takes part in activities of another person”, and partnership as “an association of two or more people formed to carry on a business”.
As per Section 4 of the Indian Partnership Act, 1932, “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”.
Main features of Partnership
As per the definition given under Section 4 of the Act, three main features of partnership can be identified:
- It must be a contract between two or more parties: It is evident that the Indian Partnership Act, 1932 was formed after repealing Chapter XI of the Indian Contract Act, 1872. Despite the elimination of the law on partnership from the Contract Act, a partnership relation is the subsequent result of a contract i.e., all the basic principles of contract law are adhered to in a partnership. Hence, such relation is not due to status, operation of law, or inheritance. This means that the members of the Hindu Undivided Family (HUF) are not bound by a contractual relationship but by status. Similarly, a son/daughter cannot become a partner by inheriting or succeeding the father who partnered in a partnership firm but can only claim his/her share of the partnership property of the deceased father. There are no provisions under the Indian Partnership Act that specify the ultimate number of partners. But according to Section 464 (1) of the Companies Act, 2013 as well as Rule 10 of the Companies (Miscellaneous) Rules, 2014, any association which has more than 50 partners and is in the business of acquisition of gain without registration itself as a company under the Company’s Act is an illegal association and if it is registered, the maximum limit is 100 partners i.e., the limit is 50 and if the partners are more than 50 up to the limit of 100, it needs to be registered.
- It is a contract of sharing profits of business: Firstly, in a partnership, there must exist some kind of ‘business’ which means every trade, occupation, and profession. Hence, if two or more persons run a charitable organization or agree to share the rent procured from a property are not considered business partners. This means that there must be an intention to run a business and to proportion the profits according to the terms of the contract. Secondly, it is essential that the said ‘business’ is to earn profit which is to be shared among the partners. Therefore, a person without any share in the profit of the business or a person carrying out the work for a philanthropic purpose or where only a single person is entitled to the entirety of the business profits is not a partner. Except that sharing the losses in an agreement does not constitute to be an important element.
- The business is run by all partners or any partner representing the other one: This is the most crucial principle and distinguishing factor from other business structures. Under this, there is a joint liability for all partners for the acts of any partner i.e., any act carried out by one partner will be considered as the act of all the other partners. Hence, each partner acts as both an agent and principal for himself and other partners respectively, i.e., he can bind by his acts the other persons and can be bound by the acts of other partners.
Partnership and Firm
Literally, a partnership can be construed in either sense and may not depict a legal relationship, or even if it does, that relationship may be only an abstract one. But when the partners collectively refer to themselves as one name through which they run their business, it is called a firm. A firm gives a partnership a necessary legal foundation and concrete object and explicitly binds the partners together.
Procedure for Registering a Partnership Firm
A partnership firm can be easily registered without any rigid formalities and the registration process is mentioned under the Indian Partnership Act, 1932, in its Chapter VII from Sections 56-71. Under this Act, there is no obligation for partnership firms to register themselves as per the provisions of this Act. However, it is always advised to register one’s partnership firm since the legal benefits and rights outweigh the autonomy of not registering your firm.
The procedure of registering a partnership firm can be done anytime during the tenure of the partnership agreement. But it must be noted that before filing a suit aiming to enforce rights arising from the partnership agreement or against third parties, the registration must be done. As per Section 58 of the Act, an application form along with a prescribed fee should be submitted to the Registrar of the area in which the firm is situated or supposed to be situated along with the signatures of all the partners or their authorized agents. Such application can be submitted to the Registrar via post or by physical delivery along with the following details:
- The firm’s name.
- The primary place of the business of the firm.
- Other locations where the business is carried out.
- The joining date of each partner.
- The names and permanent addresses of all the partners.
- The duration of the firm.
The said application must be accompanied by a list of documents:
- Application for Registration of Partnership in Form No. 1
- Duly filled specimen of Affidavit
- Certified True Copy of the Partnership Deed
- Ownership proof of the principal place of business or rental/lease agreement thereof.
- PAN Card along with the address proof of the partners.
It must be noted that despite the fact that a partnership deed i.e., a contract may be oral or written, it is generally written so as to bind the parties permanently and avoid any conflicts in the future, similarly, while registration of a partnership deed has to be submitted on a judicial stamp paper obtained from the respective State Registrar Office.
The name of the firm also is bound by certain conditions: it must not resemble an already established firm doing the same business and also the name must not be having words like an emperor, crown, empress, empire, or any other words that obfuscate the public into believing that the firm has governmental sanction or approval.
Under Section 59, if the registration application and the necessary documents are up to the satisfaction of the Registrar, he will register the firm in the Register of Firms and issue the Registration Certificate. All the updated information about every registered firm is incorporated in the Register of Firms, and anyone wanting to see it can access it by paying a fixed fee as per Section 66 of the Act.
Importance of Partnership Firm Registration
The benefits of registering one’s partnership firm as stipulated under Section 69 are:
- A partner has the right to file a suit against the co-partners for any violation of the rights arising from the contract or upon the rights provided under the Act. Such a right is not available to a partner of an unregistered firm.
- The partnership firm can file a case against the third parties for enforcing any right arising from the contract. Such a right is extinguished when the firm is not registered. Further, the right of a third party against an unregistered firm is not extinguished.
- The firm has the right to claim set-off against the suit of a third party claiming the recovery of money. This means that the registered firm can claim that the third party is also indebted to the firm for a certain amount and the same should be adjusted against the claim of the third party. This right is not available to an unregistered firm.
Hence, a partnership firm is one of the most popular and hands-down business formats opted for by small-scale entrepreneurs and businesses. It is indeed the best approach for any start-up which do not have the elaborated means and stature to increase its business. Partnership firms are the most reliable and beneficial option to go for in business entities due to the limited restrictions and painless process of registration.
- Clear Tax, “Partnership Firm Registration in India – Procedure Under Indian Partnership Act”, Clear Tax, February 1, 2022, Available at: https://cleartax.in/s/partnership-registration-india-explained (Accessed July 15, 2022).
- The Indian Partnership Act, 1932.
- Chartered Club, “Procedure to create Partnership Deed & Register a Partnership Firm”, Chartered Club, Available at: https://www.charteredclub.com/register-partnership-deed/ (Accessed July 15, 2022).
- Kaviya A, “All That You Need to Know About Partnership Firms”, Vakilsearch, June 11, 2021, Available at: https://vakilsearch.com/blog/all-that-you-need-to-know-about-partnership-firms/ (Accessed July 15, 2022).
- India Filings, “Partnership Firm: Types, Deed & Agreements in India”, IndiaFilings, Available at: https://www.indiafilings.com/learn/partnership-firm/ (Accessed July 15, 2022).
- Chartered Club, “Benefits of Registering a Partnership Firm in India”, Chartered Club, Available at: https://www.charteredclub.com/register-partnership-firm/ (Accessed July 15, 2022).