Is Partnership Firm Registration Mandatory ?

Is Partnership Firm Registration Mandatory ?

In India, there is no need to register a partnership deed. This is the short answer, as specified under part VII of the Indian Partnership Act, 1932. However, as you would expect, it isn’t the end of the topic if you’re looking to start a partnership firm. There are strong reasons to register the partnership deed, particularly because unregistered entities have severe restrictions with respect to legal enforcement of the partnership deed.

Advantages of Partnership Registration

A partnership firm is one of the most preferred means of starting a business in India because of its simplicity. You simply come to an agreement on various matters of importance (profit-sharing, etc) and put it on paper. It is signed and that’s it; you’re in business. Now, registering the partnership agreement takes away from this simplicity. That said, it does have its advantages. Let’s find out what they are.

Cannot Sue Firm: A partner in an unregistered firm cannot file a suit against said firm or his/her partners to enforce any rights arising from the contract. It also includes rights conferred by the Partnership Act unless the partner’s name is entered into the Register of Firms as a partner in the firm.

Now, imagine that you have invested some amount in an unregistered firm, and you would like to withdraw from it, or want to question a suspicious deal any of the other partners have made. While you can question them all the same, there is no way you can take them to the court, since your firm does not have a valid agreement. The unregistered agreement that you signed to start the firm will not be enough to file a lawsuit.

Cannot Sue Others: An unregistered firm has no ability to file a suit against a third party to enforce a right arising from a contract, unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.

No Set Off: As part of an unregistered firm, you, your partners or the firm cannot claim a set-off (this refers to mutual adjustment of debts owed) in a dispute with a third party.

Can Be Done Any Time
For the above-mentioned reasons, partnerships do prefer to get registered at one point or the other. So, yes, there is no need to register the partnership deed when the business is formed. Under Section 58 of the Act, this can be done at any time through an application with the Registrar of Firms that has jurisdiction where the firm is situated or proposed to be situated.

Essential Clauses in Partnership Deed

While the following clauses are essential in every partnership deed, every deed is not the same. Therefore, you need a customised partnership deed to protect your business interests.

Profit-sharing clause: This indicates how the partners in the firm will divide profits and absorb losses, whether equally or unequally. One partner might be a working partner, wherein he or she has not contributed to the initial capital, and hence, will take a lesser or a percentage of profit, while the others might have put in more capital and, therefore, may get more. A detailed account can be put in the clause, to ease out legal issues at a later stage.

Capital contribution clause: It states the amount of capital brought into the firm by each partner, what it be used for and whether the capital will be repaid on exiting the firm. Here again, the capitals need to be defined completely against the name of each partner, with the essential expenditures that will be done with it. If it is an equal capital partnership, the same will be mentioned.

Dispute resolution clause: It may state that any legal disputes will be settled through mediation or arbitration. One can put in as many clauses under this as possible (since everything needs to be pre-determined or pre-meditated) to make it legally binding.

Retirement/Termination clause: It states the conditions that need to be fulfilled for the termination of a partner, the retirement age and the consequences of either. In case of termination, the clause should indicate what and how a partner will be terminated (illegal transactions, acting against the deed, and so on.) Also, if a person wants to get out of the partnership, what is required to be done, if the capital will be returned, and so on.

What is a Partnership?

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 popular among small and medium sized businesses in the unorganized sectors.

Advantages of Partnership

Easy to Start
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.

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.

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’s and Company’s are required to file their annual accounts with Registrar of Companies each year.

Created & Posted By Ravi kumar
CA Article at TAXAJ

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