Partnership Firm Cannot Subscribe to Company MOA Except Section 8 Company

Can a Partnership Firm Be a Shareholder in a Company at the Time of Incorporation?

Brief: A partnership firm is the collective name of its partners and ordinarily cannot subscribe to the memorandum or be registered as a shareholder in its own name. Section 8(3) of the Companies Act, 2013 expressly permits a firm to be a member of a Section 8 company. For a private or public company, the partners may subscribe in their own names and hold the shares for the firm, subject to disclosure of beneficial interest under Section 89. An LLP has a separate legal identity and stands on a different footing. This article explains the legal position, the Section 8 exception and the practical disclosure requirements.

Short Answer

A partnership firm formed under the Indian Partnership Act, 1932 should not subscribe to the memorandum of association (MOA) of an ordinary private or public company or be entered in its register of members in the firm’s own name. Section 8(3) expressly permits a firm to be a member of a Section 8 company. Where a firm wishes to invest in another company, its partners can subscribe in their own names and hold the shares for the firm, with the applicable Section 89 declarations. A limited liability partnership (LLP) stands on a different footing because it is a body corporate with a separate legal identity.

Applicable Legal Provisions

• Sections 3(1), 4 and 7(1)(a), Companies Act, 2013: A company is formed by persons subscribing to its MOA, which is filed with the incorporation application.
• Sections 2(55) and 2(11), Companies Act, 2013: Subscribers become members on registration. A traditional partnership firm is not a body corporate.
• Section 8(3), Companies Act, 2013: Expressly permits a firm to be a member of a company registered under Section 8.
• Sections 88, 89 and 90, Companies Act, 2013; Rule 9 of the Companies (Management and Administration) Rules, 2014; and the Companies (Significant Beneficial Owners) Rules, 2018: Govern the register of members, declarations of beneficial interest and, where applicable, significant beneficial ownership. The SBO Rules require a separate assessment of the individuals who ultimately hold the relevant rights or entitlements.
• Rule 3, Companies (Incorporation) Rules, 2014: An OPC’s sole member must be a natural person who is an Indian citizen, subject to the rule’s other eligibility conditions.
• Section 4, Indian Partnership Act, 1932; and Section 3(42), General Clauses Act, 1897: Address the meaning of a firm and the general definition of “person”, respectively.

Relevant Extracts

• Section 4, Partnership Act: Persons who have entered into partnership are individually called partners and collectively a firm; the name under which their business is carried on is the firm name.
• Section 8(3), Companies Act: “A firm may be a member of the company registered under this section.”

Legal Position

Private and public companies, including OPCs

A traditional partnership firm has no legal existence separate from its partners; the firm name describes them collectively. The established company law approach is therefore to put the subscription and registered shareholding of an ordinary private or public company in the names of the partners, rather than the firm name. An OPC has the additional express restriction that its sole member must be an eligible natural person.

Section 8 companies

Section 8(3) specifically permits a firm to be a member of a company registered under Section 8. This is an express exception to the ordinary position. A proposed firm subscription at incorporation should also be checked against the current incorporation forms and filing requirements; the statutory wording expressly addresses membership.

A point of interpretation

Section 3(42) of the General Clauses Act defines “person” to include an association or body of individuals, whether incorporated or not. That general definition is subject to the context of the legislation in which it is used. It should not, by itself, be treated as establishing that a partnership firm can be registered in its own name as the shareholder of an ordinary company. Section 8(3)’s express permission for Section 8 companies is relevant to this interpretation. Using the partners’ names for subscription and registered ownership is the prudent approach for other companies.

LLPs

Under Section 3 of the Limited Liability Partnership Act, 2008, an LLP is a body corporate and a legal entity separate from its partners. Subject to the applicable incorporation and investment requirements, it can subscribe to shares in its own name.

Case Laws and Judicial View

Dulichand Laxminarayan v. CIT, AIR 1956 SC 354

The Supreme Court explained, in the context of partnership law, that a firm is not a legal entity distinct from its partners; its name is a collective description of them. The decision supports the underlying distinction between a firm and a separate legal person. It did not directly decide a company incorporation filing under the Companies Act, 2013.

CIT v. National Travel Services

In the deemed-dividend dispute concerning National Travel Services, shares were held in the partners’ names while the firm’s beneficial interest was asserted. The proceedings concerned the income-tax treatment of that arrangement. They should not be presented as a final Supreme Court ruling on whether a firm can subscribe to the MOA of an ordinary company. The Supreme Court referred the wider deemed-dividend issue for consideration by a larger Bench.

Practical Interpretation

• For an ordinary private or public company, show the relevant partners, rather than the firm, as subscribers and registered shareholders. Document whether each partner holds the shares personally or for the firm.
• Where a partner is the registered holder but the firm holds the beneficial interest, assess the declarations required under Section 89 and Rule 9: Form MGT-4 by the registered holder, Form MGT-5 by the beneficial owner, and Form MGT-6 by the company. The first two declarations are generally due to the company within 30 days of the relevant entry or acquisition; the company files MGT-6 within 30 days of receiving the declarations. Changes require fresh declarations as applicable.
• Assess Section 90 and the SBO Rules separately. Section 89 reporting does not itself settle whether an individual partner must make an SBO declaration.
• Check that the partnership deed permits the investment. Keep a documented decision of the partners identifying the proposed registered holders, funding arrangement and beneficial ownership.
• If the company later advances funds to the firm, examine the deemed-dividend provisions under the income-tax law applicable to the relevant year. The result depends on the shareholding and other statutory conditions.

Example

M/s Sharma Traders, a partnership of Ravi and Neha, wishes to promote Sharma Foods Private Limited and fund a subscription of 10,000 shares. Ravi and Neha subscribe to 5,000 shares each in their own names. If they hold those shares for the firm, the arrangement and source of funds should be documented, and the applicable Section 89 declarations made. If the proposed company is registered under Section 8, Section 8(3) permits the firm itself to be a member, subject to the applicable filing process.

Conclusion

A partnership firm is the collective name of its partners and should not ordinarily be shown as the subscriber or registered shareholder of a private or public company in its own name. Section 8(3) expressly permits a firm to be a member of a Section 8 company. For other companies, partners can hold the shares, with the firm’s beneficial interest documented and disclosed under Section 89 where applicable.

Author: CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES, Company Secretary in Practice, Delhi. Email: [email protected]