Registration Procedure for Partnership Firms under Indian Partnership Act

A partnership firm is a significant business organization form, that is widely adopted in India. Establishment of a partnership firm requires a minimum of two individuals, who are legally allowed to share the business profits which are only chargeable to tax by firm and exempt in hands of individual partners, it shall be shared as per the ratio which is agreed as per the deed.

This organisation structure is used for business like trading, occupation, as well as profession. This structure, like Limited Liability partnership is not governed by Ministry of corporate affairs(MCA) rather the act named The Indian Partnership Act, 1932, governs and regulates the firms which are in simple partnership.

As per the act, people who are involved in formation in partnership are known as partners, and the partnership firm is formed and based on the legal contract commonly known as the partnership deed, or a charter, which dictates terms and the relationship among the partners and between the partners and the firm, which means each partner is an agent of a firm as well as other partners in the firm.

What are the advantages of a Partnership Firm?

Establishing a partnership firm is simpler as compared to other business forms, hence the main advantage called ease of formation is there in partnership firm, this also involves drafting of a partnership deed and entering into an agreement. Apart from this deed, no additional documents are required in formation of the firm, and also registration of the firm with the “Registrar of Firms” is not mandatory, but it is recommended to register to sustain legal presence of firm.

Secondly, Partnership firms have very less compliances and legal obligations in comparison to the compliances applicable to companies or Limited Liability partnerships. Here for formation, there is no need to have a Digital Signature Certificate (DSC) for the partner or even Director Identification Number (DIN) is not required, making the process less restrictive and cost-effective, by reducing compliances of additional yearly KYC and following rigid rules, also in case there is any change in business operations, this can be easily implemented and incorporated in deed without any extensive legal formalities, that means by simple discussion among partners it can be implemented.

This lead to third advantage of quick decision making which means the decisions can be made quickly as there is no difference between ownership and management, even legally it is recognised that partners are in their own capacity is doing business in this structure. Partners can promptly implement the decisions which are taken by them, giving them the power to perform various transactions on behalf of the firm or on behalf of other partner without any legal requirement to take the consent of all partners.

Next is the partners can share profits and even losses as per the agreed ratio which is stated in the partnership deed or a charter. There is a joint accountability of all the partners, which even promote a sense of ownership of the firm, also we know in starting many businesses face losses, so in this structure, the burden of losses on individual partner is reduced and hence losses are born by partners in agreed ratio

But like other structures there are also many disadvantages of a Partnership Firm!

What are the disadvantages of partnership firm?

The major disadvantage of creating a simple partnership firm as per The Indian Partnership Act, 1932 is Unlimited Liability, which means partners are supposed to cover the firm’s losses from their own personal assets. Unlike the companies or Limited liability partnerships, which have a clause of limited liability which is to the extent of shares, partners in a firm bear full responsibility for any debts, ignoring exceptional provisions.

Secondly there is lack of Perpetual Succession, which means partnership firms often dissolve upon the death of any partner or if any partner of the firm is declared insolvent or in case any of the partner gives notice of dissolution, hence this often leads to the potential instability in the business.

Thirdly, the maximum number of partners as per the Indian Partnership Act, 1932 are 50 partners, hence it have less potential for large sized organisation, even the capital investment is limited. Hence in other words this restriction may affect the firm’s ability to undertake large-scale business activities.

Also, the partnership firms face challenges in raising capital or funds from angel investors or seed funding due to the lack of a separate legal entity and perpetual succession as discussed above. Also the firm’s inability to publish accounts publicly might reduce the trust among potential investors as well as lenders.

Last one is the registration of a partnership firm is voluntary in nature as per the Indian Partnership Act, 1932. Partners have given the option to register their firm with the Registrar of Firms of the specific state, which is at any time during its operation. Though the registration also provides many advantages, such as the ability to sue other partners or the firm or any other person, such as registration gives the right to the partnership firm so that it can enforce any kind of claims which are against the third parties.

What Steps to be followed to Register a Partnership Firm?

Step 1: Application for Registration

Partners are required to submit Form 1, which shall be signed and verified by all the partners or their agents/representatives, to the Registrar of Firms along with the prescribed fee. This form can be obtained from the Registrar’s office or might be downloaded online and it shall include the details such as the firm’s name, principal place of business, other business locations or branches, names and address of all the partners, and duration of the firm.

Step 2: Select name of the Firm

The name which is chosen shall not be identical or similar to any of the existing name of any firm which is involved in the business which is doing work of same nature or is having similar object and also it shall not include the terms such as emperor, crown, empress, or empire, which suggest government approval.

Step 3: Issuance of Registration Certificate

After the verification by the government or registrar of firms, and getting satisfied by the application, the Registrar records the firm’s details in the Register of Firms and issues a registration certificate. The Register of Firms is also accessible to the general public after payment of prescribed fees.

What are the documents required for Registration?

Documents like application for registration (Form 1) as I stated above, Certified copy of the Partnership Deed or a charter after payment of required stamp duty, Specimen of an affidavit confirming the correctness of details in the deed and documents, PAN card and address proof of partners and the firm and the Proof of the principal place of business of the firm which could either be ownership documents or lease/rental agreement

What is the government fees for partnership registration?

The government fees for partnership registration vary by state, depending on the contribution of the partners. Registration is facilitated online by the government.

What is a partnership Deed?

A partnership deed is an agreement which hereby outlines the rights, duties, profit-sharing ratios, and other obligations of each partner. It is hence advisable to have a written deed/agreement to avoid any future conflicts. Essential details that shall be included in deed includes the names and addresses of the firm’s as well as it’s partners, nature of business proposed to be conducted, the start date of the firm, capital contributions, and profit/loss sharing ratios among partners. The specific clauses might address interest on capital, salaries of the partners, rights and duties of the partners, processes for retirement and death of the partners, or dissolution of the firm.

Can partnership registration be cancelled?

A partnership registration certificate is revoked upon dissolution of the firm, which might occur automatically if all the partners become insolvent, or if the firm engages in some illegal activities

What is the estimated timeline for registration of firm?

The registration process typically takes about 10-15 days, subject to state-specific regulations and departmental approvals.

Conclusion

Under the Indian Partnership Act, 1932, registration of a partnership firm is fairly simple and beneficial for small to medium-sized enterprises in India. The key advantages include: versatility at creation, light requirements to comply with as well as fast decision-making. Unlimited liability, no perpetual succession and difficulties in raising capital are some of the potential drawbacks that should be looked into carefully. However, registration is recommended since it confers legal personality on the business entity and also offers various protections. Following these steps will assist in making a smooth registration within 10-15 days or less by straightening up some documents .As such firms are still preferred for ease of operation though they have certain protective measures put in place.