A partnership firm is not like a company, it has different features such as, the all partners are responsible for the acts of one partner and each partner is responsible for the act of the others. Partnership is not freely transferrable like that of securities in a company. A partnership does not mandatorily require certificate of incorporation in order to commence business activities, it is at the option of the partners that whether they want to register the firm or not. In this blog, we will discuss the Registration of a Firm under Partnership Act.
What Is Partnership under Partnership Act, 1932
Partnership is defined under section 4 of the Indian Partnership Act, 1932 as:
Partnership is a mutual understanding between at least 2 or more person, who come together to conduct a lawful business activity and agree to share profit earned under the partnership, all are responsible for each other’s act, similarly all take advantage of each other’s act. If the partnership is not registered, no partner is bound to stay in the partnership in case of a dispute.
Below are few essential features of a partnership firm:
- Partnership Agreement:
Contract is the basis of partnership; this is the first step in building a partnership. The company is not established by relationship, i.e., if, for example, A business was formed between four friends by entering into a partnership agreement, now only these four are considered partners in the company. If now one of them as well as his legal representative dies; his son/daughter will represent that person in the business but he/she cannot be considered as a legal partner in the business unless he/she has entered into an agreement between the other partners and a new agreement is entered into between them, hence no agreement in the company is done. Even if there is a relationship.
- Number of Partners:
As the name suggests, partnership requires a minimum of 2 people, as one person cannot be called a partner. It will be treated as a Sole Proprietorship, but at least two people are required to be called partners. So, these were the minimum requirements, but if we look at the maximum, on the fact that how many no. Partners are required, the Indian Partnership Act is silent on it, i.e., there is no limit on the maximum number of Partners under the partnership Act of India, but there are certain provisions in the Companies Act 2013 limiting the maximum number partners
A banking partnership cannot have more than ten partners, and a maximum number if the partnership is based on any other non-banking activity, then partners are limited to twenty.
- Type Of Business Activity:
Section 6 of the Indian partnership Act defines the methods of doing business which are not considered to be a partnership. For the statutes to be valid, it is essential that the person intends to conduct business activities that result in profit and loss. An activity is considered to be a business activity if it is still carried on by the partners with a view to receiving orders for the company in their name and concluding new contracts in the name of the firm.
- Profit Sharing:
The most important feature to consider and determine whether a business is a partnership is profit sharing. For a business to qualify as a partnership, the partners must first operate for profit, not for steady income. Where there is a fixed income, for example as mentioned above, if the activity is related to a fixed salary, income earned, interest earned on loan etc., then it is not a business activity, as there is no pursuit of profit which are variable and not fixed, secondly the profit should be distributed among all the partners in the proportion agreed upon among them.
- Mutual Agency Relationship:
A mutual representation relationship means that all partners are responsible for the actions of one partner and each partner is responsible for the actions of all other partners. It is a mutual agent relationship between the partners.
An essential element of a partnership is that all partners act for each other and are jointly accountable for their actions. This is a very important element of the existence of the partnership, because that would be the meaning of the partnership.
- Separate Legal Entity:
A partnership is known to its partners, unlike a partnership, which is not represented by partners but has its own legal personality, assets are acquired in the name of the partnership, partnership Contracts are entered into, business can be sued, and lawsuits can be prosecuted. Only the partners can make profits and losses, borrow, or borrow money, purchase property, and partners can sue or be sued.
- Unlimited Liability:
Unlimited liability means that at the time of liquidation of the firm, the partners will be responsible for the payment of their debts in the ratio in which they have agreed to share in profits and if the ratio is not indicated in the contract, then the liability will be divided equally among the partners.
- Restrictions On Transfer Of Shares:
The partnership cannot be transferred without the prior agreement of all the other shareholders. The profit made by the associates shall be shared among the associates only, and the associates themselves shall be liable.
Documents Required For Registration of a Firm under Partnership Act
Certain documents are required to be submitted to the registrar for the verification of the authenticity of the partnership. Below is a list of documents that are required to be submitted with the registrar for the process of registration of a firm under Partnership Firm:
- First and foremost requirement is the partnership firm registration application which is form 1
- A certified copy of the partnership deed
- Affidavit, which would certify that all the details mentioned and documents provided are true and correct.
- Pan card of all the partners
- Aadhar card of all the partners
- A proof of the place of business
The information submitted by the partners should not be outdated or incorrect, upon satisfaction of the registrar over the correctness of the documents, affidavit, and all other submissions the registrar shall issue a certificate of registration to the partners.
Registration of a Firm as Per Partnership Act – Procedure
The law does not mandate for a partnership to be registered as a firm. It is voluntary and based on the choice of the partners owing to the benefits that come up only after registering as a partnership firm. However, there are no penalties on non-registration of a partnership.
Application for Registration is provided under section 58 of the Indian partnership Act, 1932.
Here is a step-by-step guide for you if you want to register as a partnership firm:
Step 1: Application to the Registrar for the Registration of a Firm:
For partners, who wish to apply for registration of a firm, shall file a partnership registration application to the registrar of firms based on the jurisdiction of the registrar. The jurisdiction is decided on the basis of place of business of partnership firm.
The partners can opt for registration at any time, and not necessarily at the time of commencing the partnership.
The applicant can file application through offline mode. He can file the application by visiting the office of registrar or through post.
Details in Application:
- Name of the firm.
- Nature of business of firm
- The place of conduct of business.
- Any other place of conduct of business activity
- Name and address of partners
- Date of joining of partners.
- Duration of conduct of firm.
The application must be signed by all the partners and any other agents authorized in filling of application.
Section 58(1) (1A) of the Indian partnership Act provides that the application can be sent to the registrar either through post or in person within 1 year of commencement of business.
Step 2: Selection of Name of the Firm:
A partnership firm can be given any name of the choice of the partners, but it must comply by certain requirements such as:
The name should not be deceptively similar to the name of any other firm, which then would be likely to create confusion in the minds of the general public. The name should not immoral or violative of the general public principals. The name should not be such which represents the firm to be associated with the government or which is mentioned in the e Schedule to the Emblems and Names (Prevention of Improper Use) Act, 1950.
The registrar can reject the application on any of the above mentioned reasons or any other reason which the registrar may think fit. All the provisions relating to restrict ions on name is not applicable of the frim is not registered or say before the registration of a firm.
Step 3: Appeal against the Order of the Registrar:
The registrar can reject the application if he is not satisfied with any of the details mentioned in the application. Such as Name of the firm, or any misleading statement or facts.
If the application is rejected, then the partners will have a time period of 30 days from the day of the receipt of order, within which they can file an appeal against the order of the registrar to the Deputy Secretary to Government authorised by the State Government.
The appeal against the order of the registrar is chargeable at a prescribed fee, after the receipt of the appeal the, applicant will be given an opportunity of being heard and represent himself after hearing of the case the officer shall announce the decision which will be final and binding.
Step 4: Certificate of Registration:
The provision of Certificate of registration is provided under section 59 of the Indian Partnership act 1932.
Upon satisfaction with the contents of the application, the registrar shall issue the certificate of registration to the partners. The application must be free of any fraudulent or misinterpreting statements and the application should be true to the best of knowledge of the applicants.
If the application was rejected before and the applicants are able to prove themselves, in the hearing of the case, then the decision of the officer shall be final. If the officer is satisfied then the registrar shall issue the certificate of registration to the applicants.
Subsequent to that the partnership shall be registered as a partnership firm.
Section 59A-1 of the Indian Partnership Act 1932
It provides an opportunity to the partners against the provision under section 58(1)(1A) of the Indian partnership Act which provides that the application can be sent to the registrar either through post or in person within 1 year of commencement of business.
But Section 59A-1 of the Indian Partnership act, provides a window against the limitation of 1 year mentioned under section 58(1)(1A), by allowing the partners to submit an application for registration even after lapse of 1 year of the commencement of the partnership.
A penalty of 100 INR is applicable on the partners for every consequent year after the lapse of 1st year of commencement of partnership, after the payment of the accumulated penalty to the registrar, the application shall be submitted thereof.
A partnership deed is the heart and soul of the partnership firm, it mentions all the details of the firm such as: the profit sharing ratios of the partners, the rules and regulations, the code of conduct of the business, the objective of the business, the name of the partnership firm, etc.
A partnership deed is not required to be written necessarily, it can be oral or written. However, it is better to write down the partnership deed, as it is natural for the human mind to forget, and besides that oral partnership deed could give rise to disputes leading to breaking of the partnership. Hence, it is advisable to record the partnership deed.
Contents in a Partnership Deed
The content provided in a partnership deed is general and specific details. Further elaboration on the content is provided below:
- Name and address of the firm.
- Name and address of the partners
- Nature of the business activity
- Date of commencement of the partnership.
- Capital and other resources contributed by each partner
- Profit and loss sharing ratio
The partnership deed has some other specific details besides the general details of the partners and the firm such as:
- Drawings of each partner
- Interest on capital invested
- Loan provided by partners to the firm
- Salary payable to the partners
- Rights and obligation of each partner
- Process to be followed if a partner is retired or get deceased.
- Adjustments at the time of dissolution of the firm.
- Such other clauses as to rules and regulations.
Effects of Non-Registration of a Firm
Unregistered firms are denied certain rights under Section 69 of the Act, which addresses the consequences of non-registration of a firm. According to the Act:
- A partner of an unregistered business cannot sue the firm in any court or unless the firm is registered and the person suing is or has been listed in the Register of Firms as a partner in the firm, they cannot sue other partners for the enforcement of any right deriving from a contract or right granted under the Partnership Act.
- No lawsuits to enforce a contractual claim against a third party may be brought by or on behalf of a firm in any court unless the firm is registered, and the plaintiffs are or have been listed as partners in the Register of Firms.
- In a disagreement with a third party, an unregistered business or any of its partners cannot assert a set of (i.e., mutual adjustment of debts held by the disputants’ parties to one another) or other processes. Therefore, every business considers it wise to register themselves at some point in the future.
It is recommended that partnership shall be registered owing to its benefits and usage. A partner can sue only on the basis of partnership registration, even though the firm will not have a separate legal entity, the contracts can be entered and executed on the partner’s name. Hence, to avoid disputes which will lead to arbitration settlement or court proceedings it is better to be prepared beforehand.