Partnership, in a layman language, refers to the coming together of two or more people to carry out a certain task. In the corporate structure of India, the Indian Partnership Act (1932) (referred to as Act hereafter), defines partnership as “the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” In a proprietary business an individual has constraints on the ability, skill and capital to run the business, besides liability that can occur anytime.
Any firm which falls under the category of a small or medium scale business can prevail under the partnership, as there are limited legal compliance. It is not mandatory to register as a partnership firm under the Act, but registering a firm gives the partnership a legal identity and has several advantages in case of disputes among the partners, settling claim against third party.
A partnership is governed by a partnership deed, which must be a written document duly signed by all the partners. The deed fulfills the requirement of dissipating information about the firm – name, partners’ details, nature of the business, the location of the business and others. Without much hassle to accumulate a minimum capital, two or more people can start a partnership firm, as there is no minimum capital requirement under the Act.
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How to Register as a Partnership Firm?
The increasing use of technology has also allowed the government entities to make functions like registration and compliance online. In India, although a number of states still follow an offline procedure, there are few states who have adopted the online registration process which requires the application to be filed with the Register of Firms (ROF).
Follow these simple steps to register for a Partnership Firm under the Act.
1. Choose name for a partnership
A firm should select a name that does not resemble the name or color-able imitation of the entity that is already public. Partnership name should not be similar or identical to existing company doing the same business. Applicant can check the validity of his/her chosen name at Ministry of Corporate Affairs website
2. Draft a Partnership Deed
The partnership deed is the most important document for the registration of the company as it provides the registrar with the following necessary information:
- Name and address of company and all partners
- Contact details of partners
- Nature of the business
- Duration of the partnership
- Profit/Loss sharing ratio
- Rules regarding the solvency of the firm
- Information of capital to be contributed by each partner
Additionally, the Deed also contains information about the remuneration payable to partners in excess of the profit shares, responsibilities of partners, audit procedures, etc.
3. Apply for a PAN Card in the Partnership Name
A firm, irrespective of registration under the Act, has to apply for a Permanent Account Number to the Income Tax Department. This can be applied on the basis of a current account in the name of the firm. The PAN is a requirement to fulfill the obligation of paying taxes.
4. File a registration application
The registration application requires a firm to provide information regarding the name of the firm, the nature of the business carried out, address of the business, names and addresses of all the partners, date of commencement of business. This form is further taken to the registrar in the region of the firm’s main office.
5. Submit the necessary documents
Along with the registration application, the following documents are 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 partnership deed
- Specimen of Affidavit
- PAN Card in the name of partnership firm
- 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
6. Pay the fees and stamp duties
A registration fee and a stamp duty need to be paid at the time of the submission of the documents with the Registrar. The fees vary across states. One must understand that the registration is not complete until all dues are paid.
7. Finalize the Deed
To legalize the Deed, it should be provided to each partner in a written form on a stamp paper. One stamp paper deed should be duly signed by all the partners in front of the notary. The value of the stamp varies from state-to-state. The signed copy is thereafter submitted to the Registrar during the registration process.
8. Certification from the Registrar
The registrar, after thorough examination of the documents, will issue a registration certificate.
The firm will be thus on record in the Register of Firms. On the date of this entry, the firm shall be deemed to be registered. The partnership firm is required to add ‘(Registered)’ after its name from the date of registration.
A lot of states in India now provide the facility of registering partnership firms online. The online registration of partnership firm requires the firm to file an application online. The firm will have to furnish the same information on this form. The acknowledgement number raised after the submission of the application is further used to login on the website and the firm has to upload the scanned copies of all the above mentioned documents. The registrar will review the documents and the certificate will be sent through an email.
Key Features of a Partnership Firm
A partnership firm has elements that make it suitable for small and medium scale businesses.
Some of the key features of a Partnership Firm are:
- A partnership firm can have a minimum of two and maximum of hundred members, according to the Companies Act, 2013.
- A registered firm is also required to use ‘(Registered)’ after the firm name
- Increased manpower often leads to integration of specialised skills and abilities that could help in a rapid growth
- A partnership firm unlike a company has no separate legal entity, except if the type of partnership is a Limited Liability Partnership
- Each partner in a partnership firm has an unlimited liability, but a Limited Liability Partnership (LLP) removes this shackle and limits the obligations of a partner
- There is no minimum capital requirement for commencing a partnership firm
- A partner is restricted to transfer his/her profits or rights entailing from the partnership without the consent of all partners
- In either case, a partnership firm is registered or unregistered under the Act, third parties can sue the firm to enforce their claim
- A registered firm, which is mandated to comply with the legal and taxation documentation, has an added advantage when it approaches banks for capital or working capital loans
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Benefits of a Partnership Registration
A partnership firm compared to proprietary business has an upside of inculcating more skills, capital and risk sharing; and compared to a company it has an upside of easy processes, and minimal compliance that makes partnership a viable option for small and medium scale enterprises. Some of its key benefits include:
- The partners in a partnership firm get the benefit from risk sharing, unlike an individual in a proprietary firm whose liability can be unlimited
- The most important benefit that arises from the registration is that when there are disputes between or among the partners, a partner can sue the other partners
- Registration also enables the Partnership firm to sue third parties to enforce its claim
- The dissolution procedure for a registered Partnership firm is reliable and quick
In legal disputes, the first thing the court establishes is whether the incorporation is registered. Therefore, it is advisable to get the partnership registered under the Act.
Q1. Does the law prohibit a non-citizen to become a partner?
The Act does not prohibit a non-citizen from participating as a partner, subject to certain clearances from the Government.
Q2. Can a minor become a partner?
The act prohibits a minor from entering into a partnership contract. However, a minor can be admitted to advantage from the profits with the consent of all the partners.
Q3. What is partnership at will?
According to the Act, when there is no mention about the duration of the partnership, or determination of the partnership, the partnership is considered ‘partnership at will’.
Q4. Can a new partner be admitted to the partnership?
Yes. Generally a partner nominates the successor in case of retirement or death of that partner. The terms of the admission of a new partner are usually mentioned in the Partnership Deed. A new agreement entailing the new profit sharing ratio is required to be made.
Q5. Can a partnership firm become a partner in another firm?
The firm cannot become a partner in another firm as a partnership firm is not a separate legal entity. However, a partner may be a partner in multiple corporations.