Partnership Firms Registration Procedure Under Indian Partnership Act

A partnership firm is one of the most important forms of a business organization. It is a popular form of business structure in India. A minimum of two persons are required to establish a partnership firm. A partnership firm is where two or more persons come together to establish a business and divide its profits amongst themselves in the agreed ratio. The partnership business includes any kind of trade, occupation and profession. 

The Indian Partnership Act, 1932 governs and regulates partnership firms in India. The persons who come together to form the partnership firm are knowns as partners. The partnership firm is constituted under a contract between the partners. The contract between the partners is known as a partnership deed which regulates the relationship among the partners and also between the partners and the partnership firm.

Advantages of Partnership Firm

Easy to Incorporate

The incorporation of a partnership firm is easy as compared to the other forms of business organisations. The partnership firm can be incorporated by drafting the partnership deed and entering into the partnership agreement. Apart from the partnership deed, no other documents are required. It need not even be registered with the Registrar of Firms. A partnership firm can be incorporated and registered at a later date as registration is voluntary and not mandatory.

Less Compliances

The partnership firm has to adhere to very few compliances as compared to a company or LLP. The partners do not need a Digital Signature Certificate (DSC), Director Identification Number (DIN), which is required for the company directors or designated partners of an LLP. The partners can introduce any changes in the business easily. They do have legal restrictions on their activities. It is cost-effective, and the registration process is cheaper compared to a company or LLP. The dissolution of the partnership firm is easy and does not involve many legal formalities.

Quick Decision

The decision-making process in a partnership firm is quick as there is no difference between ownership and management. All the decisions are taken by the partners together, and they can be implemented immediately. The partners have wide powers and activities which they can perform on behalf of the firm. They can even undertake certain transactions on behalf of the partnership firm without the consent of other partners.

Sharing of Profits and Losses

The partners share the profits and losses of the firm equally. They even have the liberty of deciding the profit and loss ratio in the partnership firm. Since the firm’s profits and turnover are dependent on their work, they have a sense of ownership and accountability. Any loss of the firm will be borne by them equally or according to the partnership deed ratio, thus reducing the burden of loss on one person or partner. They are liable jointly and severally for the activities of the firm.

Disadvantages of Partnership Firm

Unlimited Liability

The biggest disadvantage of the partnership firm is having an unlimited liability of the partners. The partners have to bear the loss of the firm out of their personal estate. Whereas in a company or LLP, the shareholders or partners have liability limited to the extent of their shares. The liability created by one partner of the partnership firm is to be borne by all the partners of the firm. If the firm’s assets are insufficient to pay the debt, then the partners will have to pay off the debt from their personal property to the creditors. 

No Perpetual Succession

The partnership firm does not have perpetual succession, as in the case of a company or LLP. This means that a partnership firm will come to an end upon the death of a partner or insolvency of all the partners except one. It may also be dissolved if a partner gives notice of dissolution of the firm to the other partners. Thus, the partnership firm can come to an end at any time.

Limited Resouces

The maximum number of partners in a partnership firm is 20. There is a restriction on the number of partners, and hence the capital invested in the firm is also restricted. The capital of the firm is the sum total of the amount invested by each partner. This restricts the firm’s resources, and the partnership firm cannot take up large scale business.

Difficult to Raise Funds

Since the partnership firm does not have perpetual succession and a separate legal entity, it is difficult to raise capital. The firm does not have many options for raising capital and growing its business as compared to a company or LLP. As there are no strict legal compliances, people have less faith in the firm. The accounts of the firm need not be published. Thus, it is difficult to borrow funds from third parties.

What is Partnership Registration?

Partnership registration means the registration of the partnership firm by its partners with the Registrar of Firms. The partners should register their firm with the Registrar of Firms of the state where the firm is located. Since partnership firm registration is not compulsory, the partners can apply for registration of the partnership firm either at the formation of the firm or subsequently at any time during its operation.

For partnership registration, the two or more people must come together as partners, agree on a firm name and enter into a partnership deed. However, partners cannot be members of a Hindu Undivided Family or husband and wife. 

Importance of Registering a Partnership Firm

The registration of a partnership firm is optional and not compulsory under the Indian Partnership Act. It is at the discretion of the partners and voluntary. The firm’s registration can be done at the time of its formation or incorporation or during the continuance of the partnership business. 

However, it is always advisable to register the partnership firm as a registered partnership firm enjoys certain special rights and benefits as compared to the unregistered firms. The benefits that a partnership firm enjoy are:

• A partner can sue against any partner or the partnership firm for enforcing his rights arising from a contract against the partner or the firm. In the case of an unregistered partnership firm, partners cannot sue against the firm or other partners to enforce his right.
• The registered firm can file a suit against any third party for enforcing a right from a contract. In the case of an unregistered firm, it cannot file a suit against any third party to enforce a right. However, any third party can file a suit against the unregistered firm.
• The registered firm can claim set-off or other proceedings to enforce a right arising from a contract. The unregistered firm cannot claim set off in any proceedings against it.

Procedure for Registering a Partnership Firm

Step 1: Application for Registration

An application form (Form 1) has to be filed to the Registrar of Firms of the State in which the firm is situated along with prescribed fees. It has to be signed and verified by all the partners or their agents. The application form (Form 1) can be obtained from the Registrar of the Firms office or it can be downloaded from the respective state's Registrar of Firms website. 

The application can be sent to the Registrar of Firms through post or by physical delivery, which contains the following details:

• The name of the firm.
• The principal place of business of the firm.
• The location of any other places where the firm carries on business. 
• The date of joining of each partner.
• The names and permanent addresses of all the partners.
• The duration of the firm. 

Step 2: Selection of Name of the Partnership Firm

Any name can be given to a partnership firm. But certain conditions need to be followed while selecting the name:

• The name should not be too similar or identical to an existing firm doing the same business.
• The name should not contain words like emperor, crown, empress, empire or any other words which show sanction or approval of the government.

Step 3: Certificate of Registration

If the Registrar is satisfied with the registration application and the documents, he will register the firm in the Register of Firms and issue the Registration Certificate. The Register of Firms contains up-to-date information on all firms, and anybody can view it upon payment of certain fees.

An application form along with fees is to be submitted to the Registrar of Firms of the State in which the firm is situated. The application has to be signed by all partners or their agents.

Documents for Registration of Partnership

The documents required to be submitted to Registrar for registration of a Partnership Firm are:

• Application for registration of partnership (Form 1)
• Certified original copy of Partnership Deed.
• Specimen of an affidavit certifying all the details mentioned in the partnership deed and documents are correct.
• PAN card and address proof of the partners.
• PAN card and address of the firm.
• Proof of principal place of business of the firm (ownership documents or rental/lease agreement). 

Partnership Firm Registration Fees

The government fees applicable for a partnership firm registration varies from state to state, depending on the partner’s contribution. However, you can register your partnership firm online quickly and cost-effectively through the ClearTax Partnership Firm Registration Plan. 

Partnership Firm Registration Plan amount – ₹7,500*

The Partnership Firm Registration Plan amount includes the following services:

• PAN application
• Partnership deed drafting
• Filing of deed and other documents with the Registrar of Firms
• Issue of registration certificate 
• 100% online process
• Session with Cleartax expert

*Price shown above may vary. Please click here to contact our experts for complete pricing details

Name Given to the Partnership Firm

Any name can be given to a partnership firm as long as you fulfil the following conditions:

• The name shouldn’t be too similar or identical to an existing firm doing the same business,
• The name shouldn’t contain words like emperor, crown, empress, empire or any other words which show sanction or approval of the government.

Partnership Deed

A partnership deed is an agreement between the partners in which rights, duties, profits shares and other obligations of each partner is mentioned. A partnership deed can be written or oral, although it is always advisable to write a partnership deed to avoid any conflicts in the future.

Details Required in a Partnership Deed

General details

• Name and address of the firm and all the partners.
• Nature of business.
• Date of starting of business Capital to be contributed by each partner.
• Capital to be contributed by each partner.
• Profit/loss sharing ratio among the partners.

Specific details

Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a later stage:

• Interest on capital invested, drawings by partners or any loans provided by partners to the firm.
• Salaries, commissions or any other amount to be payable to partners.
• Rights of each partner, including additional rights to be enjoyed by the active partners.
• Duties and obligations of all partners.
• Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of the firm.
• Other clauses as partners may decide by mutual discussion.

Timelines for Partnership Firm Registration

The partnership firm registration process takes approximately 10 days, subject to departmental approval and reverts from the respective department.

Checklist for Partnership Firm Registration

• Drafting of Partnership Deed.
• Minimum two members as partners.
• Maximum of equal to or less than twenty partners.
• Selection of appropriate name.
• Principal Place of business.
• PAN card and bank account of the firm.

FAQs on Partnership Firm Registration

How much time does it take to register a partnership firm in India?

The registration of a Partnership Firm in India can take up to 10 to 14 working days. However, the time taken to issue a certificate of incorporation may vary as per the regulations of the concerned state. The registration of a Partnership Firm is subject to government processing time which varies for each State.

Can a partnership be considered invalid?

Often, if the partnership agreement is not registered, the court may deem a partnership invalid. If the object of the business is illegal, the court may consider the partnership invalid and dissolve the partnership.

Can all the partners mutually decide to end the partnership firm?

If the partners of a firm wish to end the partnership firm, they can do so by dissolving the partnership by notice, when it is a partnership of will. A partnership firm can be dissolved in accordance with the terms laid out in the Partnership Deed or by creating a separate agreement.

Can a partnership registration certificate be cancelled?

A partnership certification of incorporation is revoked when the firm is dissolved. A dissolution can be brought upon automatically when all partners or all partners except one partner are declared insolvent or if the firm is carrying unlawful activities, i.e. like trading in drugs or other illegal products, corporate malpractice or making business engagements with countries that may harm the interest of India.

What is the scope of liability of partners in a partnership firm?

Every partner is jointly liable with all the other partners and also individually, for all acts/activities of the firm, during the course of business while he/she is a partner. This means that if a loss or injury is caused to any third party or a penalty is levied during the course of business all partners will be held liable even if the injury or loss was caused by one of the partners.

Related Articles:

Documents required for Partnership Registration in India.

Partnership Firm Tax Return Filing – eFile Procedure

Partnership Deed Format – Sample Partnership Agreement Template

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