Partnership Firm- Registration Procedures and Rules

Partnership Firm- Registration Procedures and Rules

Introduction

A Partnership Firm is a popular form of business constitution for businesses that are owned, managed and controlled by an association of people for profit.

Partnership firms are relatively easy to start and is prevalent amongst small and medium sized businesses in the unorganized sectors. Though with the introduction of Limited Liability Partnerships in India, Partnership Firms are fast losing their prevalence due to the added advantages offered by a Limited Liability Partnership. 

Types of Partnership Firm

There are two types of Partnership firms, registered and unregistered Partnership firm. It is not compulsory to register a Partnership firm, however it is beneficial to register a Partnership firm due to the advantages available to registered firm. Partnership firms are created by drafting a Partnership deed amongst the partners.

Reasons to Register a Partnership:-

1.Easy to Form

 A Partnership is easy to form as no cumbersome legal formalities are involved. Its registration is also not essential. However, if the firm is not registered, it will be deprived of certain legal benefits. The Registrar of Firms is responsible for registering partnership firms. 

2.Business Name

Since the name of a Partnership firm is not registered, a Partnership firm can choose to have any name - as long as it does not infringe on a registered trademark. However, since the name is not registered, any other person can also use the same business name unless trademark registration is obtained and no infringement of rights of other firms.

3.Annual Filing NOT Required

A Partnership firm is not required to file its annual accounts with the Registrar each year unlike a Limited Liability Partnership or Company. Limited Liability Partnership and Company are required to file their annual accounts with Registrar of Companies each year.

4.Partnership Deed

In a Partnership firm, the partnership deed will determine the ownership of the firm, profit sharing ratio, rights and responsibilities of each of the Partner. A partnership deed can be registered with the Registrar.

5.Bank Account 

Bank account can be opened in the name of a Partnership firm. To open bank account, the partnership deed copy and KYC documents of the Partner must be submitted along with any other document as required by the Bank. 

Partnership Deed

• A partnership deed is a written legal document underlining the rights and responsibilities of members of a partnership.
• A partnership firm is not legally bound to register, however, the registration confers certain benefits which can be used to the firms advantage. 
• The Indian Partnership Act of 1932 governs partnerships in the country. The registration of Deeds of Partnership (Indian Registration Act 1908) is salient in order to promote mutual understanding and trust among the partnership members.
• It stands as a testimony to the terms and conditions on which the business is founded and therefore is of grave importance in case of disputes. 

Benefits for the registered firms:-  

1. Right to file a lawsuit

Registration allows the firm to file a lawsuit against a third party. If an unregistered firm wishes to file a case, it needs to register itself under the Indian Partnership Act prior to filling of lawsuit. 

2. A co-partner’s right to protection 

In case of dispute between partners, an unregistered partner cannot sue its counterpart if he or she is not registered. 

3. Protection of property 

The property of a retired or deceased partner continues to be liable for the acts of firm even after the partner’s death or retirement until public notice is served for the change to registrar. But in case of an unregistered firm, the property will be considered to charge the debts in spite of death or retirement. 

4. Protection of creditors

A registered company has to keep its records up to date. This protects the creditors from evasion of liabilities on part of the partners. 

5. Government facilities 

Registered firms work under the rules and regulations of the government and also enjoy protection in business and production. 

6. Public confidence

People lay their trust in registered companies more than unregistered companies since they fall under the government.  

7.Rights of unregistered firms

Non registration allows the following rights to be exercised by unregistered firms:-         

• To bring a lawsuit of the firm’s dissolution or for settlement of accounts.
• The unregistered firm or its partners may use or claim a set-off where the subject matter of the suit does not exceed Rs. 100 in value.
• Third parties can always use a firm whether it is registered or not.

Registration process

The registration of the partnership firm can be done before starting business or during continuance of partnership. However, as mentioned earlier, for filing lawsuits a partnership firm needs to be registered. 

• The process of registration involves two steps-filing an application and submission of required documents. 
• The first step is registering a partnership firm and filing an application with the Registrar of Firms. 
• The partnership agreement must be printed on a Non-Judicial Stamp Paper according to Indian Stamp Act 1899. 
• The partnership agreement is usually signed in the presence of all the partners and each of the partners would retain a signed original for his/her records.  

The application should contain the following information:

• The name of the firm.
• The principal place of business of the firm.
• The names and addresses of partners and the dates on which they joined the firm.
• If the firm is started for a particular period then that period should be mentioned.
• If the firm is started to achieve a specific objective then it should also be mentioned.
• Application for registration of partnership in Form 1.
• ID and Address Proof of Partners like Pan Card/Passport/Voter ID/Aadhar Card/Driving License Copy of the Partners.
• Address proof of business place– if property is rented:- Rent Agreement and NOC from Landlord - if property is own:- Electricity Bills or any other Address Proof.

Once the procedure for application is fulfilled, the Registrar of Firms makes an entry in the Register of Firms and issues a Certificate of Registration. 

LLP vs Partnership Firm in India

Partnerships registered under the Partnership Act, 1932 used to be a very popular form of Business Entity in India due to the simplicity of registration and ease of maintenance. With the introduction of the Limited Liability Partnership (LLP) in India through the Limited Liability Partnership Act, 2008, the prominence of Partnership’s has been replaced by the LLPs. 

LLPs are easy to register & offer a range of benefits to the promoters and is easy to maintain, making it ideal for many small and medium sized business that would  otherwise opt to start as a Proprietorship or a Private Limited Company.

Number of Partners & Requirement 

Partnership- Any Indian Citizen residing in India can be a Partner in a Partnership Firm including minors. A Partnership Firm must have a minimum of 2 Partners and can only have a maximum of 20 Partners. The Partnership Deed defines aspects such as management of the firm and one or more partners can be designated to manage the Partnership Firm. 

Limited Liability Partnership- Any Indian Citizen residing in India can be a Partner in a LLP. Foreign Direct Investment is allowed in a LLP with prior RBI approval. Minors are however not allowed to be part of a LLP. A LLP must have a minimum of 2 Partners and is allowed to have unlimited Partners. The LLP Agreement governs aspects of management of a LLP and one or more Partners can be designated to manage the activities of the LLP.

Transferability or Conversion 

Partnership- The share in a Partnership can be transferred to another person after obtaining the permission of all the Partners in a Partnership. The transferability of a Partnership is cumbersome. Partnership can be converted into a LLP or a Private Limited Company, through a lengthy process.

Limited Liability Partnership-The share of a LLP can be transferred. However, the Transferee is not allowed to become a Partner automatically. The share of a LLP can be transferred to another person more easily. A LLP can be converted into a Private Limited Company or a Limited Company easily. 

Compliance & Taxation 

Partnership- The Profits of a Partnership firm are taxed at 30% + educational cess. There are no annual return filing requirement for a Partnership firm.

Limited Liability Partnership- The Profits of a LLP are taxed at 30% + educational cess. 

LLP must file annual return with the Ministry of corporate affairs (MCA). 

Registration 

Partnership- Partnership firms are registered with the Registrar of Firms. A Partnership Deed must be drafted for registering the Partnership firm with the Registrar of Firms.

Limited Liability Partnership- LLPs are registered with the Ministry of Corporate Affairs. LLP registration process is similar to that of a Private Limited Company Incorporation  process, viz. obtaining Digital Signature Certificate for the Partners, obtaining Designated Partner Identification Number (DPIN) for the Partners, obtaining name approval from MCA, obtaining Incorporation Certificate and filing LLP Agreement.