Partnerships are popular forms of business organizations. An entity in which two or more people form a business and share profits in an agreed ratio. Trades, occupations, and businesses can be established through partnerships. Company formation is complex. A partnership firm registration requires fewer regulations.
Partner firms in India are governed by the Indian Partnership Act, 1932. Partnership firms are formed by individuals who form partners. A contract between the partners binds the partnership firm. Partners sign a partnership deed that regulates the relationship between them and between them and the partner firm.
Establishing a partnership firm requires registration
Partnership firms are not required to be registered under the Indian Partnership Act. Partner registration is at their discretion. Incorporate or form a firm at any time, or continue operating as a partnership.
However, it has always been recommended to register the partnership firm since it enjoys certain special rights and benefits over the unregistered firms. Partnership firms can:
- If a partner has a right arising from a contract against another partner, or against the partnership firm, the partner can sue the partner. Unregistered partnership firms cannot be sued. The partners cannot enforce their rights.
- If a registered firm has a contract right, it can sue any third party to enforce it. An unregistered firm cannot sue anybody to enforce its rights. In the meantime, any third party can sue the unregistered firm.
- Firms can seek set-off or other measures to enforce a contractual right. A company that is not registered cannot claim setoff in court.
Registration a partnership
Step 1: Registration Application
To file an application with the Registrar, a fee must be paid along with the application form. Every partner or their representative must sign and verify the registration application.
Postal applications or physical deliveries must include the following information:
- You can recognize a firm by its name.
- Our company is based in this location, which is where we conduct most of our business.
- You will also need to determine the location of any other offices where the firm has business.
- Dates of joining each partner.
- Here are the names and permanent addresses of all the partners.
- This firm will last for a certain period of time.
Step 2: Name selection for the partnership
A partnership firm can be referred to by any name. There are, however, certain criteria that should be considered before choosing a name:
- A company name should not be too similar or eerily similar to that of an existing business.
- Names that contain words like an emperor, crown, empress, empire, or any other words that show government sanction or approval are not allowed.
Step 3: Registration Certificate
The Registrar will issue the Registration Certificate if he is satisfied with the firm’s registration application and documents. A fee is required to view the Register of Firms, which contains accurate information about all of the firms.
The company must submit an application along with fees to the Registrar of Firms of the state where it is located. Signed applications must be completed by all partners.
Partnership Registration Documents
Registration of a Partnership Firm must be done by submitting the following documents to the Registrar:
- A form for the registration of partnerships (Form 1)
- I have a copy of the Partnership Deed that has been certified as the original.
- Provide an example of an affidavit verifying that all the details stated in the partnership deed format and other documents are accurate.
- A PAN card and address proof must be provided by your partners.
- Obtaining proof to prove the business location of the firm (ownership documents or a contract for rental/lease).
The registrar will then enter the firm in the Register of Firms and issue a Certificate of Registration.
Anyone can access the Register of Firms upon payment of a small fee and view up-to-date information on all firms.
Benefits of Partnership Firms
Easy to implement
The incorporation of a partnership firm is easier than the incorporation of other types of corporations. Formalizing a partnership firm involves drafting a partnership deed and entering into a partnership agreement. No other items are needed. In fact, it does not even have to be registered. Partner firms can incorporate and register as they are not required to register.
Compliance rate drops
As compared to a company or LLP, partnerships have very few compliances. LLP partners do not require a Digital Signature Certificate (DSC) or Director Identification Number (DIN), which is only needed for company directors. They can customize the business as they wish. They may have legal restrictions.
It is a cost-effective alternative to a company or LLP. Dissolution of a partnership firm involves few formalities and is easy.
Partnerships are quick to make decisions due to the fact that there is no distinction between ownership and management. All decisions are made by the two partners jointly, and they can be implemented immediately. The partners are equipped with wide powers and can perform various activities on behalf of the firm. Even without the permission of other partners, they can conduct certain transactions on behalf of the Partnership Firm Registration.
Profit and Loss Sharing
The partners split the firm’s profits and losses. Even the profits and losses of the partnership firm are theirs to decide. Due to the firm’s dependence on their work, they are responsible for the profits and turnover. The firm’s losses will be borne equally or according to the partnership deed ratio, which reduces the load on one person. Its activities are jointly and severally liable.
Partnership firm disadvantages
Limitation of Liability
Partners have unlimited liability in a partnership. Those who lose the firm must bear the loss out of their personal estates. A company or LLP, on the other hand, limits the liability of its shareholders to the extent of its shares. The liability of one partner of the partnership firm should be shared by all the partners. Partners will be forced to pay their personal property to the creditors if the firm’s assets are insufficient to pay its debt.
No Permanent Succession
Companies and LLPs don’t have perpetual succession as does a partnership firm. It means that a partnership firm will come to an end upon the death or insolvency of all but one of the partners. It can also be dissolved if a partner gives notice of its dissolution to its other partners. Hence, the Partnership Firm Registration can dissolve at any time.
Ideally, a partnership firm has 20 partners. Capital investments in the firm are also restricted due to the number of partners. The capital of a firm is the sum of each partner’s investment. As a result, the partnership firm cannot handle large-scale business.
Raise funds is difficult
A partnership firm without perpetual succession and a separate legal entity make it difficult to raise capital. As compared to a company or LLP, the firm has fewer options for raising capital. No strict legal requirements mean people have less confidence in the firm. Financial statements are not required. Loans are hard to obtain.