A Partnership is one of the most important forms of a business organization. A partnership firm is where two or more persons come together to form a business and divide the profits in an agreed ratio. The partnership business includes any kind of trade, occupation and profession. A partnership firm is easy to form with fewer compliances as compared to companies.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
An application form has to be filed to the Registrar of Firms of the State in which the firm is situated along with prescribed fees. The registration application has to be signed and verified by all the partners or their agents.
The application can be sent to the Registrar of Firms through post or by physical delivery, which contains the following details:
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.
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.
The documents required to be submitted to Registrar for registration of a Partnership Firm are:
Any name can be given to a partnership firm as long as you fulfil the following conditions:
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.
Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a later stage: