How to Register Partnership Firm in India? By: Harshit Sharma

The Author, Harshit Sharma, is a 5th year student of Amity Law School, Madhya Pradesh. He is currently interning with LatestLaws.com.

INTRODUCTION

In India, an investor and businessman has got a wide variety of options to open his business either in the form of a Sole Proprietorship or a Company or in the form of a Partnership Firm. It is worthy to quote here that on the basis of capital pool, limited liability and distinct personality, one may of his choice can establish any of the aforementioned form of business, which suits them.

In this context, Partnership Firm are the most popular forms of business organisations in India for the Partners Entrepreneurs. its need just only 2 Person or more to Start a Business.

FEATURES & CHARACTERISTICS OF A PARTNERSHIP FIRM

In India, course of partnerships and partnership firms from its formation to its dissolution are regulated and controlled by the provisions of the Indian Partnership Act, 1932. In the light of the same, various features and characteristics of the partnership firm are as follows:[i]

1. Two or More Persons:

At least two persons must pool resources to start a partnership firm. The Partnership Act, 1932 does not specify any maximum limit on the number of partners. However, the Companies Act, 1956 lays down that any partnership or association of more than 10 persons in case of banking business and 20 persons in other types of business is illegal unless registered as a joint stock company.

2. Agreement:

A partnership comes into being through an agreement be­tween persons who are competent to enter into a contract (e.g. Minors, lunatics, insolvents etc. not eligible). The agreement may be oral, written or implied. It is, however, to put everything in black and white and clear the fog surrounding all knotty issues.

3. Lawful Business:

The partners can take up only legally blessed activi­ties. Any illegal activity carried out by partners does not enjoy the legal sanction.

4. Registration:

Under the Act, registration of a firm is not compulsory. (In most states in India, registration is voluntary). However, if the firm is not registered, certain legal benefits cannot be obtained. The effects of non-registration are- (i) the firm cannot take any action in a court of law against any other parties for settlement of claims and (ii) in case of a dispute among partners, it is not possible to settle the disputes through a court of law.

5. Profit Sharing:

The partnership agreement must specify the manner of sharing profits and losses among partners. A charitable hospital, educa­tional institution run jointly by like-minded persons is not to be viewed as partnership since there is no sharing of profits or losses. However, mere sharing of profits is not a conclusive proof of partnership. In this sense, employees or creditors who share profits cannot be called partners unless there is an agreement between the partners.

6. Agency Relationship:

Generally speaking, every partner is considered to be an agent of the firm as well as other partners. Partners have an agency relationship among themselves. The business can be carried out jointly run by one nominated partner on behalf of all. Any acts done by a nominated partner in good faith and on behalf of the firm are binding on other partners as well as the firm.

7. Unlimited Liability:

All partners are jointly and severally responsible for all activities carried out by the partnership. In other words, in all cases where the assets of the firm are not sufficient to meet the obligations of creditors of the firm, the private assets of the partners can also be attached. The creditors can get hold one any one partner —who is fi­nancially sound-and get their claims satisfied.

8. Not a Separate Legal Entity:

The firm does not have a personality of its own. The business gets terminated in case of death, bankruptcy or lunacy of any one of the partners.

9. Transfer of Interest:

A partner cannot transfer his interest in the firm to outsiders unless all other partners agree unanimously. A partner is an agent of the firm and is ineligible to transfer his interest unilaterally to outsiders.

10. Mutual Trust and Confidence:

A partnership is built around the principle of mutual trust, confidence and understanding between partners. Each partner is supposed to act for the benefit of all. If trust is broken and partners work at cross purposes, the firm will get crushed under its own weight.

TYPES OF PARTNERSHIP FIRM

Broadly classifying the Partnership Firms in India, the basis is the registration and non-registration of the firm, in accordance with the provisions of the Indian Partnership Act, 1932 and its allied rules & regulations. The two types of Partnership Firm are hereby illustrated:[ii]

• Unregistered Partnership Firm:

The Unregistered Partnership Firm is established by entering into agreement by the partners of the proposed firm. The Unregistered Partnership Firm as stated to be legal allows the Partners to carry on the business in manner stated and provided in the agreement.

• Registered Partnership Firm:

The Partnership Firm is to be registered with the Registrar of Firm (RoF) having jurisdiction over the Place of Business of the Firm. The registration of Partnership firm involves payment of Government fees to Registrar, varied from state to state according to the State Law.

ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP FIRM

Following are the Advantages of the Partnership Firm:[iii]

1. Easy to Start

Partnership firms are one of the easiest to start. The only requirement for starting a partnership firm in most cases is a partnership deed. Hence, a partnership can be started on the same day. On the other hand, an LLP registration would take about 5 to 10 working days, as the digital signatures, DIN, Name Approval and Incorporation must be obtained from the MCA.

2. Decision Making

Decision making is the crux of any organization. Decision making in a partnership firm could be faster as there is no concept of the passing of resolutions. The partners in a partnership firm enjoy a wide range of powers and in most cases can undertake any transaction on behalf of the partnership firm without the consent of other partners.

3. Raising of Funds

When compared to a proprietorship firm, a partnership firm can easily raise funds. Multiple partners make for more feasible contribution among the partners. Moreover, banks also view a partnership more favourably while sanctioning credit facilities instead of a proprietorship firm.

4. Sense of Ownership

Every partner owns and manages the activities of their firm. Their tasks might be varied in nature but people in a partnership firm are united for a common cause. Ownership creates a higher sense of accountability, which paves the way for a diligent workforce.

As this Article specifically connotes to the Registration of Partnership Firm, it is worthy to quote here the advantages of the Registered Partnership Firm, which are stated as follows in the light of Section-69 of the Indian Partnership Act, 1932:[iv]

1. The major advantage of registration is that a partner of registered partnership can sue the co-partners and as well as the firm in case of dispute.
2. The registered firm can also sue third parties as well as any of its partners in its own name to enforce its claim.
3. The third parties who have dealings with the firm can sue the firm to enforce their claim against the firm.
4. The incoming partner can enforce his right against the remaining partners rather than relying on the honesty of co-partners.
5. The retired partner is liable to all the acts of the firm dealing with third parties before his retirement. The partner who is retired from the partnership will be discharged from the liabilities from the date of his retirement from partnership by giving a public notice and effecting the necessary changes in the register of firms. As per section 33 of partnership act, the expelled partner will be treated in the same way when a partner retires from the partnership.
6. A partner is entitled to sue for the dissolution of the firm or for the accounts of a dissolved firm or to enforce any right or power to realize the property of a dissolved firm.
7. The registered firm is entitled to claim tax benefits under the provisions of Income Tax Acts.

Following are the Disadvantages of the Partnership Firm:[v]

(1) Limited Capital: In the partnership firm, there is a restriction on the members of the partnership, therefore, the total amount of capital which can be invested in case of the partnership is limited to the sum total of the individual amount invested by each partner. It is not attainable for the Partnership firm to collect huge capital.

(2) Unlimited Liability: The liability of each partner is joint and several. The firm cannot conduct any large business activity. This is because, if the assets of partners are insufficient to pay off the debts, then the personal property of partners is taken over by the creditors.

(3) Instability: The continuity of the firm is always doubtful because it comes to end by the death, insolvency or insanity of any of the partner, or a partner may even dissolve the partnership by giving 14 days’ notice.

(4) Restriction on Transferability of Interest: A partner cannot transfer his partnership interest to an outsider without the consent of all partners. A partner is also not authorized to bring any new partner without the consent of another partner. This shows that there is a restriction on transfer of interest.

(5) No Public Confidence: The registration of the firm is not compulsory. There is the absence of government control further the firm needs not publish its accounts. Due to this, the firm cannot get the confidence of the public

(6) The absence of Separate Legal Status: A firm is not an artificial person like Joint Stock Company. It is not recognized by the law as a person. The existence of the firm is related to the partners. The insolvency of the partner is the insolvency of the partnership.

(7) The absence of Central Authority: All partners are joint owners; they have full right to the management. There is no different authority to control the different partners. Therefore, it is difficult to bring them together.

(8) Conflicts and Disputes: Unity among the partners is essential for the success of the partnership. But the unity among the partners cannot be secured. When the number of partner increases, differences of opinion and disputes tend to arise and disturbs the smooth working of the business.

(9) Restricted Number of Partners: As the number of partners are restricted to 10 in the case of banking business and to 20 in the case of any other business. The capital that can be collected by a partnership is limited

(10) Risk of Implied Authority: Each partner is considered an agent of the Partnership Firm. He can confine the co-partners by his activities. On account of this authority of the partner, honest partners have to suffer for the absurd, careless or untruthful actions of immoral partners.

(11) Lack of Continuity : A partnership firm has a shortcoming in regards to the continuity because of death of the partner, insolvency, insanity or retirement of a partner, firm may come to end as time period expires or purpose for which it was formed is completed and if the court orders the partnership firm to dissolve its Business.

(12) Absence of Legal Status: The Indian Partnership Act, 1932, does not give independent legal status to the partnership. As registration is not mandatory except in certain states, no differentiation is made between a partnership firm and its partners.[vi]

PROCESS OF REGISTRATION OF A PARTNERSHIP FIRM

This portion will deal with the in-depth analysis of the registration process of partnership firm in India with the requisite fees, documents etc. required which is hereby illustrated in a step-by-step process:

STEP 1: Choosing the Name of Partnership Firm

It is worthy to note that, the name of Partnership firm shall not be identical to any name which is already used by other business entity and is in the market. Moreover, the Indian Partnership Act, 1932 specifically bars the usage of the terms or words, vide its Section 58(3) such as Crown, Emperor, Empress, Empire or words expressing or implying the sanction, approval or patronage of Government except when the State Govt. signifies its consent in writing to the use of such words as part of the firm name. [vii]

Further, Enter the name you've chosen at http://www.mca.gov.in/mcafoportal/showCheckCompanyName.do to make sure it isn't already taken by another company. You can also check to make sure a domain name and trademark are available for your chosen name on the same website. And for additional protection as well as security, do take the Trademark Protection for the Firm’s name you have chosen.

After choosing appropriate name, move on to Step-2.

STEP 2: Drafting of the Partnership Deed

It is important to note that the Partnership Deed is unique for every venture and depends upon the terms and conditions which were reached unanimously by the partners of the firms, yet the following things should find place in the Partnership Deed:[viii]

A. General Details:

1. Name and address of the firm and all the partners

2. Nature of business

3. Date of starting of business Capital to be contributed by each partner

4. Capital to be contributed by each partner

5. Profit/loss sharing ratio among the partners

B. Specific Details:

Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a later stage:

1. Interest on capital invested, drawings by partners or any loans provided by partners to firm

2. Salaries, commissions or any other amount to be payable to partners

3. Rights of each partner, including additional rights to be enjoyed by the active partners

4. Duties and obligations of all partners

5. Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of firm.

6. Other clauses as partners may decide by mutual discussion.

STEP 3: Finalize the deed in the proper format. 

To be legal, your partnership deed needs to be printed on stamp paper and signed by each of the partners. The partners' signatures should be signed in front of a notary. The notary will stamp each signature as valid.[ix]  

• The value of the stamp paper required for a partnership deed varies depending on location. You can find the amount by checking the Stamp Act for the state in India where your partnership is located and payment of the same to the notary.
• After the deed is signed, make enough copies that each partner has a copy for their records. Keep the original as part of the business records.

STEP 4: Documents which are important for Partnership Deed Registration[x]

Partnership Deed

Although partnership deed can be oral, generally a partnership deed is written to avoid any future conflict. Partnership deed is created on a judicial stamp paper of Rs. 2,000/- and has to be signed by all the partners. It contains rights and duties of the firm and the partners.

Documents of Partners

PAN card of partners – All partners are required to submit their PAN number as identity proof.

Address proof of partners – Partners can submit Aadhar Card, Driving License, passport or Voter ID card as address proof. Name and other details on address proof should match PAN card details.

Documents of Firm

PAN card of firm – Partners need to apply for PAN of the firm. Form 49A has to be filed to apply for a PAN. It should be filled online by visiting https://www.onlineservices.nsdl.com/paam/endUserRegisterContact.html

It can be filed online if the authorised partner signs the application using a digital signature certificate. Else, the application and requisite documents have to be sent to PAN processing centre, Pune.

Address Proof of firm – If the registered office place is rented, rent agreement and one utility bill (electricity bill, water bill, property tax bill, gas receipt etc.) have to be submitted. Also, NOC from landlord will be submitted.

If the registered office place is own, utility bill has to be submitted mentioning the name of the owner. Also, a NOC from the owner (owner as mentioned in utility bill) has to be submitted.

Additional Documents in case of Registration

In case partners wish to register the partnership firm, they need to submit partnership deed, ID and address proofs of the firm as well as the partners to the Registrar of Partnerships. With it, an affidavit is also required to be submitted certifying that all the details mentioned in deed and documents are correct.

GST Registration

For obtaining a GST registration, a firm needs to submit PAN number, address proof and identity & address proofs of partner. Authorised signatory will sign the application either using a digital signature certificate or E-Aadhar verification.

Current Bank Account

For opening a current bank account, a firm needs to submit following documents:[xi]

1. Partnership deed

2. Partnership firm PAN card

3. Address Proof of the partnership firm

4. Identity proofs of all the partners

5. Partnership registration certificate (if partnership has been registered)

6. Any registration document issued by central or state government (normally GST certificate is submitted)

7. Copy of electricity bill, telephone bill or water bill (not more than 3 months old)

8. Authorisation letter on the letterhead of the firm authorising a partner as authorised signatory for the bank account.

STEP 5: Initiate and Complete your Registration Application.

Your registration application includes basic information about your firm, including the partnership's name and business address, the names and addresses of all the partners, the duration of the partnership, and the date you started business. Each partner must sign the application in the presence of a notary, who will notarize the signature.  

• Download a blank copy of the form at https://www.karnataka.gov.in/karigr/Downloads/Formats%20under%20Indian%20Partnership%20Act/Frm%201.pdf if you want to complete it in advance.
• You can look at an example of a completed form at https://biharregd.gov.in/Society/Online/FORM1.pdf.

It is important to note that the process of registration is optional as per the provisions of Indian Partnership Act, 1932.[xii]

STEP 6: Submit your application and supporting documents to Registrar of Firms and Registrar of Companies with the requisite fees and stamp duty

Take your paper application to the Registrar of Companies to complete your registration. To locate the Registrar of Companies nearest you, go to http://www.mca.gov.in/MinistryV2/registrarofcompanies.html and scroll through the list. In addition to your application, bring the following documents:

• A certified original copy of your Partnership Deed
• The PAN card for your partnership firm
• Address proof for the partnership firm (ownership deed or lease)
• PAN cards and proof of address for all partners
• An affidavit certifying all details in the application are correct

When you take your documents to register your partnership, the Registrar will tell you any fees and stamp duties that you owe. These fees vary depending on your business's location. Your partnership will not be registered until all fees and duties are paid.  

• You may want to call ahead to the Registrar's office and find out what the fees are in your area.

STEP 7: Wait to receive your certificate from the Registrar. 

The Registrar reviews your application and documents. If everything is in order, the Registrar will officially register your partnership firm. Within a few weeks, the official registration certificate will be mailed to your business address.

• You should get the certificate within a few weeks of the date you submitted your application. However, since registration of a partnership isn't legally required, you don't need the certificate to start doing business.[xiii]

Thus, after getting the Registration Certificate from the appropriate authority, the Partnership Firm will be duly registered and from the date of the Registration, the firm will be entitled to all the benefits of that of Registered Partnership firm, as has been quoted in the Indian Partnership Act, 1932.

JUDGMENTS AND CASE LAWS IN RELATION TO REGISTERED PARTNERSHIP FIRM

1. Delhi Development Authority vs Kochhar Construction Work and Anr. [(1998) 8 SCC 559]

The Hon’ble Supreme Court of India in the instant matter has categorically held that, “The provision of the Act it was not possible to subscribe to the view that subsequent registration of the firm will cure the initial defect, because of the proceedings. They not have been instituted as the firm in whose name the proceedings were instituted was not a registered firm on the date of the institution of the proceedings.”[xiv]

2. Purushottam Sharma & Anr. V/s. Shivraj Fine Art Litho Works & Ors. [Civil Appeal No. 4092/1998]

The Hon’ble Apex Court enunciated by holding as follows, “With respect, we find ourselves in complete agreement with the principles enunciated in Haldiram Bhujiawala and Anr. (supra). Having regard to the purpose Section 69(2) seeks to achieve and the interest sought to be protected, the bar must apply to a suit for enforcement of right arising from a contract entered into by the unregistered firm with a third party in the course of business dealings with such third party. If the right sought to be enforced does not arise from a contract to which the unregistered firm is a party, or is not entered into in connection with the business of the unregistered firm with a third party, the bar of Section 69(2) will not apply.”[xv]

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[1] Wiki How, supra ix.

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[1] Indian Kanoon, Purushottam Sharma & Anr. vs. Shivraj Fine Art Litho Works & Ors., INDIAN KANOON (Feb. 22, 2020, 01:09 PM), https://indiankanoon.org/doc/1239673/.

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