A Partnership Firm is where two or more persons come together with an agreement to form a business for a profit motive, wherein they decide to mutually share the profits and liabilities of the business. Persons who decide to enter into a partnership with one another are individually referred to as “Partners” and collectively a “Firm.” The name under which the firm carries out its business is known as the firm name.
Registration of Partnership
The registration of the partnership is solely decided upon by the partners. There is no legislative mandate upon the registration of the partnership. However, it’s always advisable that the partners mutually decide upon the registration of the firm under the Indian Partnership Act, 1932, as it provides the firm certain exclusive rights and advantages.
Hence, even though the registration of a firm is not explicitly mandated, it is implied that in order to enjoy the benefits provided from the registration of a firm and partnership, it’s an essential step as only the registered firms acquire a legal existence.
A firm can be registered at any time before its existence or during the continuance of the partnership. However, it must be kept in mind that in order to enforce a legal right arising out of any legal document by filing a case, a firm shall do so only after the registration of the firm. Another instance wherein registration of a firm becomes a necessity is when the firm wishes to adopt a new form or organization such as an LLP or company with ease.
Further, the registration of firms at the income tax department is mandatory for both registered and unregistered firms by the registrar.
Another important point is the proof of registration of the firm. Conclusive proof of registration of a firm is any certified copy of any entry relating to the firm in the register of the firm. Further, any statement, notice of intimation that is recorded or noted with the registrar of the firm shall also be deemed to be conclusive proof of its registration.
Advantages of Registration of Firm
- Benefits to partners –
- Registration of firms provides the firm with its legal existence. This essentially means that partners of the firm can sue the other partners, ex-partner, or the firm in case a dispute arises out of a partnership agreement or a right arising out of the partnership act for such purpose.
- A partner can only enjoy these rights subsequent to registration of the firm. Further, the partner, if the circumstance arises, can file a suit against a third party to exercise any right arising out of a contract or any other legal instrument.
- In doing so, the name of the partner raising the action must be registered in the register of firms. The same is not applicable for the third parties to sue the firm.
- However it must be noted that this immunity doesn’t apply in case of criminal liability of the partner against others. Partners of a firm can exercise their right to set off a debt against creditors.
- Benefits to Creditors –
- Registration of a firm enables the partners of the firm whose names are written on the deed to be equally responsible to repay the creditor’s debts.
- This enables the creditor to claim their money from the firm; hence the credibility of the registered firm immensely increases.
- Benefits w.r.t Income Tax –
- A registered firm can claim tax benefits under the Income Tax Act, which enable the firm to save funds which could then be utilized for the growth of the firm. This is only if registration of a firm is done.
- Benefits to a new partner –
- The new partner can enforce his dues against the existing partners if defaulted. If the firm is not registered, no such partner would be enabled to enforce such a right against the existing partners. This benefit to the new partner can only be enjoyed post registration of the firm.
Essentials of Partnership
- Contractual Relationship – There must exist a contractual relationship among the partners. This contractual relationship must either be oral or written. However, at instances where there is no oral or written contract, merely existing upon mutual understanding would be sufficient to establish a relationship.
- Two or More Persons – The Partnership act provides for the number of persons essential for a partnership by demanding a mutual agency amongst two or more persons. The persons entering into a contract must have the capacity to contract.
- Mutual Agency – Partnership is a mutual agency in which the partners carry out a business. Where one partner acts for all of them as an agent, the partner acts as a principal, and the others as the agent. All the partners are liable for the act of one owed to the relationship of mutual agency.
- Profit Sharing – A partnership firm is formed for a profit motive. The association of partners in a partnership firm is for sharing profits. The profits earned are appropriated amongst the partners in a predetermined ratio, as specified in the deed. In cases where no ratio is mentioned the division is done equally.
- Carrying on a business – Every firm is established with the purpose of carrying on a business. The business shall be in any form of trade, profession, or occupation. The business is initiated with a profit motive otherwise, it doesn’t qualify as a partnership.
Procedure for Registering a Partnership Firm
- Application for Registration of firm – An application needs to be filed with the registrar of firms of the jurisdiction in which the firm is situated, along with the prescribed fees. This registration form is required to be attested and verified by all the partners. The application must contain the following details –
- The name of the firm
- The principal place of business
- The location of all the places where the firm carries on business
- The date of joining of each partner
- The names and permanent addresses of each partner
- The duration of the firm.
The application can be sent to the Registrar of Firms through post or by physical delivery.
- Selection of a Name – Any name can be given to the partnership firm, however it is subject to certain conditions. The first being that the name shall not be similar or identical to an existing firm in the same business. Second, the name shouldn’t contain words that portray sanction or approval of the government.
- Draft the Partnership Deed – The deed among the partners of the firm consists of rights, responsibilities, profit shares, along with all the necessary obligatory clauses. The agreement must be written and signed instead of an oral agreement to avoid future conflict. The necessary information to draft a deed is as follows:
- Name, address, nature of business, date of establishment, capital invested, profit or loss division ratio.
- Interest-based on the capital investment of each partner
- Salaries, including all financial drawing by the partners
- Rights, Duties, and obligations of every partner specified by name
- Alignments in case of mishaps such as defaults or death of a partner
- All the clauses mutually decided among the partners
- Application for PAN – A firm has to apply for a Permanent Account Number to the Income Tax Department, irrespective of the registration. The PAN is a requirement to fulfill the obligation of paying taxes.
- Submit the Documents – The following documents are required to be submitted to the registrar as a part of the registration process:
- Application for registration of partnership (Form 1)
- A certified original copy of the partnership deed
- Specimen of Affidavit
- PAN Card in the name of the partnership
- Proof of address of the partnership firm, ownership deed, lease and rent agreements, etc. are common acceptable documents.
- PAN Cards and address proofs of all the partners
- Pay the Fees and Stamp Duties – Registration Fees and Stamp Duty is required to be paid at the time of submission of the documents with the registrar. The registration is not complete until all dues are paid.
- Finalize the Deed – In order to legalize the Deed, it shall be provided to each partner on a stamp paper, and it should be attested by all the partners in front of the notary. The signed copy is thereafter submitted to the Registrar during the process of registration.
- Receiving the Certificate – Following all the above requirements, if the Registrar is satisfied with the application and the documents, he will register the firm in the Register of Firms and issue the Registration Certificate. The Register contains all the updated information of all the firms and can be viewed by anyone upon payment of the required fees. To know more about the process of registration get legal online advice.
Registration of Firm is highly recommended, even though it’s not a legal mandate. The partnership provides clarity and a sense of transparency amongst all the partners. Registration enables the partners to file a case against third parties and other partners.
It grants the power to claim set-off against any third-party claim and it makes the process of conversion into any other business structure much easier. The above-mentioned points are some essentials that one is required to be aware of before starting a partnership firm. A partnership firm is an appropriate manner to initiate a business.
However, as an entity grows, diversification and expansion happens in the business structure as per the requirements of the individuals. Hence these key points enable one to make better decisions to establish a successful business. To know more, get online legal advice.