Overview of Partnership Firm Registration
A Partnership refers to a business structure that attracts minimal risk & has better legal stability. A partnership firm is formed by two or more people with the help of a partnership deed. The said agreement lays down the legalities of the business and the profit ratio of the partners. Such entities are easy to form owing to the presence of minimal compliances. The Indian Partnership Act, 1932 regulates the partnership-based entities in India. The involved parties responsible for the formation of a partnership firm are regarded as partners.
What are the key Advantages of Partnership Firm?
Partnership firm is one of the most popular business structures in India and it offers the following benefits:
Easy to Incorporate
The incorporation of a partnership firm is relatively easy and seamless as compared to another form of business. The incorporation of a partnership firm begins with drafting a legal contract, known as a partnership deed. Keep in mind that the partnership deed is the only fundamental document required for incorporating a partnership firm.
Attracts minimal Compliances
The partnership firm has to stay in line with minimal compliances as compared to business structures like LLP. The absence of directors in a partnership firm mitigates the requirement of securing the DSC, i.e. Digital Signature Certificate or Director Identification Number. Reconstitution of the partnership firm via partnership deed is seemingly easier than other business structures. Also, these firms attract minimal operation-based compliances. The dissolution of such firms can be done without addressing heaps of compliances.
Allows partners to make quick decision
The absence of a large management structure allows partnership firms to make swift decisions. Since the majority of the decision making is in the hand of the serving partners, there is no need of appointing additional officials to serve such a purpose.
Profits and Loss Ratio is at the partners’ discretion
Partners have the right to decide on the Profit and loss ratio as per mutually agreed terms. This leaves no disparity or vagueness among the serving partners, thereby ensuring the improved stability of the firms.
In view of this, the individual partner is not required to address the entire loss. The presence of the associate partner can help them compensate for the loss on the agreed terms.
Importance of Incorporating a Partnership Firm
Unregistered partnership firms are more prone to dissolution and have weaker legal stability. On the other hand, registered firms do not attract such risks and offer more benefits to the serving partners.
A partner of the partnership firm is vested with the right to sue to associate partner for misconduct or unlawful activities. It is needless to mention that partners of unregistered firms lack such rights, even if the conflict of interest is with the third party.
Key Documents required for incorporating the Partnership firm in India
The documents required to be furnished before the ROFs of the partnership firm includes;
- Application form, i.e. Form 1, duly signed by the serving partners
- A true copy of Partnership Deed enclosing the seal and signature of the concerned authority
- Specimen of an affidavit authenticating all the information cited in the partnership deed & documents are legitimate.
- Permanent Account Number, i.e. PAN & resident proof of the partners
- Proof the business place, i.e. lease agreement or rent agreement
Significance of a Partnership Deed in the Legal Landscape
A partnership deed is essentially referred to as a legal contract between the partners that outline rights, obligations, and terms for profit-loss ratio, dissolution clause, so on & so forth. In general, the partnership deed carries the following provisions;
- Establishment Name
- Nature of business
- Address of the business place
- Time span of partnership firm, if any
- Quantum of capital to be contributed by serving partners
- Limit on amount eligible for withdrawal for each partner
- Duties and obligations of the serving partners
- The profit-sharing ratio.
Apart from these, certain clauses may be incorporated into the deed to avert any conflict in future;
- Interest on capital invested, drawings by serving partners or any credits facilitated by partners to the Firm.
- Salaries or other expenses to be payable to serving partners
- Processes to be followed in the event of partner loss, death, or dissolution of the Firm
A Detailed Checklist for the Registration of Partnership Firm
- Drafting of Partnership Deed
- Availability of at least two partners, the upper limit has been maxed out at 20 as per the prevailing Act.
- Selection of a legit name for a proposed firm
- Principal Place of business
- Permanent Account Name, i.e. PAN & bank account of the Firm
Step-by-Step procedure of registering a Partnership firm in India
Following is the detailed procedure of legalizing a partnership firm in India:
Step 1: Application for Registration
An application form must be filed to the ROFs of the respective state in which the Firm is situated and the standard fees. The registration form should enclose the signature of the proposed partners.
Usually, an applicant can send the application form to the ROFs via registered post. Refer to the below checklist before dispatching the application to the said authority. The checklist encloses the mandatory details that should be enclosed in the application form.
- Proposed Firm’s name
- The principal Place of business
- Address of the ancillary unit, if any
- The date of joining of each partner
- The names & addresses of the proposed partners
- Year of the establishment of the Firm
Step 2: Choose the legalized name of the Firm
Keep the following points in mind for selecting a suitable name for the proposed Firm;
- The name should not create a conflict of interest with any third parties or the existing Firm.
- The name should be distinctive and original.
- The name must stay in line with prevailing Act like Trademark Act and Emblem and Name Act, 1950.
Step 3: Certificate of Registration
If the Registrar finds no error in the submitted form & documents, he will grant the registration certificate & register the proposed firms in the Register of Firms.
The register of firms encloses all the details of the registered Firm and is accessible to business owners, i.e. partners, after the submission of the standard fees.
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Frequently Asked Questions
The registration of a partnership firm can be done in one to two weeks. However, the said time frame could vary in accordance with the regulations of the concerned state.
A partnership firm may cease to exist in the following cases:
- Absence of a partnership deed
- Partners fail to conduct business in accordance with the underlying object of the Firm
- Business undertakings of the Firm seem illicit
- Insolvency of the partners
Dissolving a partnership firm simply refers to a discontinuation of a business under the name of the said Firm. In this scenario, all liabilities are addressed either by selling off assets or transferring them to the concerned partner, settling all accounts with the partnership firm.
Common events in which partners can opt for partnership firm dissolution are;
- Death of partner
- Expiry of the partnership tenure
- Completion of a task
If all the partners want to dissolve the Firm on priority, they can proceed accordingly pursuant to clauses mentioned in the deed. That is the easiest and safest way to dissolve a partnership firm in India.
In general, a partnership firm registration can be revoked. Dissolution usually comes to existence when all partners or all serving partners except one are declared insolvent. Another event in which such a possibility may come to life is the unlawful conduct of the firm or trade malpractice.
In general, every partner in a partnership is equally accountable for addressing loss or injury caused to any third party. Further, they are also liable to jointly confront the penalties imposed during the course of the business. In case of inter-business losses, the liability of the partners will remain the same, i.e. they are all required to compensate losses even if one partner causes such happening.
Well, from a legal standpoint, Partnership registration is an absolute necessity. The unregistered partnership firms are more susceptible to unexpected dissolution and have a weaker legal base.
Partnership firms are bound to comply with the provisions of the Partnership Act, 1932. The registration of such firms is in the hand of the Registrar of firms of the respective state.
Presently, GST registration is mandated for all sorts of businesses except NGOs. The applicability of GST depends on the annual turnover of the entity. The second criterion that decides the GST imposition is the inter-state supply.
The unregistered partnership firm does not have the following leverages which ultimately strengthen its legal standing;
- Suing defaulter in case legal dispute
- Access to possible tax exemption
- Seamless dissolution of Firm
- Clarity on rights and obligations