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Partnership Firm Registration: All You Need To Know

Partnership Firm Registration:

Partnership is another important form of business organization apart from sole proprietorship and company form of business structures.

There are circumstances where it would not be possible for an entrepreneur alone to arrange for the requisite capital and resources. Further, the nature of business is such that it requires increased supervision and control, division of work and sharing of risks.

But, the number of members available to share the risk as well as profits is not very large as in the case of a company. Further, the size of the business undertaken is not big enough for a company form of organization to be adopted.

This is when partnership form of business can be undertaken by the entrepreneur. So, let’s understand what is partnership form of business and how partnership firm registration takes place.

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What is Partnership?

Partnership is a form of business entity where two or more persons come together to provide the requisite resources and share the profits in an agreed ratio. Indian Partnership Act, 1932 defines “Partnership” as

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“the relation between the persons who have agreed to share the profits of the business carried on by all or any of them acting for all.”

Thus, persons who agree to form a partnership form of business entity are individually called as partners. Further, the persons forming a partnership are collectively known as “firm”.

According to the Companies Act, 2013, the minimum number of persons required to form a partnership form of business is 2. Whereas the maximum number of members in case of partnership firm should not exceed 100.

This is unlike the Companies Act 1956, which prescribed the maximum limit of members as 10 in case of partnerships and 20 for banking and other businesses.

Characteristics of Partnership Firm

1. Formed on the Basis of an Agreement

Partnership firm comes into existence based on an agreement between two or more partners agreeing to undertake the business. The terms and conditions that govern such a partnership are outlined in a document known as the Partnership Deed.

2. Existence of a Business Activity

The Partnership form of business activity can be formed only on the basis of the existence of a business activity. The business can be anything and include any trade, industry or profession.

3. Sharing of profit and Loss Between The Partners

Partners are entitled to share the profits as well as bear the losses if any in the course of business.

4. Existence of an Agency Relation

All partners or any one partner acting on behalf of others can undertake partnership business. This means each partner is a principal in himself who can act in his own right. Further, he can also act on behalf of other partners by acting as their agent.

5. Unlimited Liability of the Partners

Each Partner is personally liable for all losses arising in the course of business. That is to say, their personal assets can be used to pay off the outstanding debts of the partnership firm.

6. Combined Management

Each partner is entitled to participate in the day to day operations of the business. However, it is not mandatory for each partner to participate in day-to-day operations of the business. But, partners running the business need to take consent of other partners for making the requisite decisions.

7. Limitation on the Transferability of Share

A partner cannot transfer his share to any other person. He may however do so on the consent of other partners.

8. No Compulsory Registration

It is not mandatory to register partnership form of entity. However, the partners can choose to register the firm with the Registrar of Firms.

9. Duration of the Partnership Firm

The partnership Firm may continue as long as the partners wish to do so. However, as per law, the partnership can come to an end if any of the partners dies, retires or becomes insolvent. But, the remaining partners can continue doing business under the same name after sorting out the due share of the outgoing partner.

How To Choose A Partnership Firm Name?

The partners forming part of a partnership business entity can at their will choose any name for their business. This is however subject to the following rules. As per section 58(3) of the Indian Partnership Act, 1932:

  • A partnership firm should not contain the following words in its name. These include Crown, Emperor, Empire, Empress, Imperial, King, Queen, Royal or other words that indicate sanction or approval by the government.
  • The name should not be too similar to any of the names of the existing firms engaged in similar businesses. The idea behind such a rule is to avoid injuring the reputation or goodwill of the existing firm if the new firm adopts a similar business name.

What is a Partnership Deed and How is it Formulated?

Partnership Deed is basically a document that charts out the rights and responsibilities of all the partners in the business entity. The Deed is enforceable by law and acts as a guide to the partners in carrying out the day to day business activities.

Further, it helps to avoid any discrepancy or disagreement with regards to the role of each partner and the benefits that accrue to them. The key elements of the partnership deed are as follows:

  • Name, principal address and a short outline of the nature of the business undertaken by the partners.
  • Important financial information such as:
  • amount of capital invested,
  • profit and loss sharing,
  • salaries due and
  • method of distributing income to each partner.
  • Method of accounting to be followed for cash flow, profit and loss and assets and liabilities of the business. Further, it also determines the fiscal year to be followed in all the accounting statements and how such statements are to be shared among the partners and other shareholders.
  • Duties, powers and the liability of each partner. The Deed may also spell out the name of the partners who would act as the managing partner and would be liable for managing the day-to-day business.
  • Information with regards to necessary actions to be taken in case of withdrawal or death of a partner.
  • Details about method of changing the partnership rights in case of expulsion of a partner.
  • Method of dissolving the partnership in case of termination of the business.
  • Information with regards to the mode of arbitration of disputes.

Partnership Firm Registration in India

Partnership form of business entities come under the Indian Partnership Act, 1932. According to this Act, it is not mandatory to register partnership firms. This means it is completely a choice of partners whether to register such form of business entity. However, in case the partners choose not to register the partnership firm, they would not be able to avail the benefits available to registered partnership firms.

Section 58 of the Indian Partnership Act, 1932, lays down the provisions for Partnership Registration. These provisions are as follows.

1. Application for Registration

Partnership firm can be registered by sending an application in Form No. 1. Along with the form, requisite fee and a true copy of the partnership deed also needs to be sent to the Registrar. Such an application needs to be filed with the Registrar of Firms of the area in which business is located. Thus, the application must outline:

  • Firm name and nature of business of the firm
  • Place or principal place of business
  • Names of other places where business is undertaken
  • Date of joining of each partner
  • Full names and addresses of the partners
  • Duration of the firm

Further, such an application must be signed by all the partners or agents who are specially authorized to do so on their behalf. Also, it must be sent to the Registrar within a period of one year from the date of formation of the partnership firm.

2. Verification of Application for Registration

Each partner signing such an application must also verify the same in the manner as suggested under the Act.

3. Documents To Be Attached To The Application for Registration

Following documents along with the prescribed fee must be submitted to the Registrar. These include:

  • Registration Application in Form No. 1
  • Duly filed affidavit
  • Certified and true copy of Partnership Deed. It must be noted that the Partnership Deed created by the partners must be on a stamp paper as the Indian Stamp Act. Or the Deed must be on a stamp paper that is applicable in the State in which such a Deed is implemented.
  • Rental or Lease Agreement or proof of ownership of place of business

4. Fee for Registration

As per section 71 of the Act, the State government is free to make rules regarding the fees to be given to the Registrar along with the other documents for registration.

5. Naming A Partnership Firm

The name of the partnership firm should consider the rules mentioned in the above section while choosing a name for the partnership firm. However, the firm so registered must use brackets and the word (Registered) after its name.

Further, if any partner is not satisfied with the order of the Registrar with regards to the firm name, he may appeal to the person authorized by the State Government in this behalf. This appeal must be made within 30 days from the date of communication of such an order and on the payment of the requisite fee.

The authorized officer on receiving the appeal would make the decision in this regard.

6. Entry of Statement in a Register

Finally, as per section 59 of the Act, the Registrar makes an entry of the Statement in a register called the register of forms and files the Statement. This is undertaken after the Registrar is satisfied that the application of registration complies with all the necessary provisions. The date on which the Registrar records and files the Statement is considered as the date of registration of the Partnership firm.

7. Apply For a PAN Card

It is important to note that registration with the Registrar of Firms is not the same as the registration with the Income Tax Department. It is necessary for all the firms to apply for registration with the Income Tax Department and obtain a PAN Card.

7. Open a Bank Account

After receiving the PAN Card, the partnership firm must open a current account in the name of the firm. This is done to undertake all the operations via the current account of the business.

To help you with understanding the procedure behind partnership firm registration in India, here is an infographic on Partnership Firm Registration.