A Partnership Firm is a flexible business structure which is highly preferred by the individuals. It enables individuals to join forces and pursue their entrepreneurial ambitions collaboratively.
If you’re interested in finding out about what a partnership firm registration is, you’re on the right page. Continue scrolling to read through the entire article!
What is a Partnership Firm?
Basically, a partnership firm is a business entity which is established and regulated under the Indian Partnership Act, 1932. Section 4 of the Act defines a “Partnership” as a “relation amongst the partners who have agreed to share the profit of business carried on by all or any one of them acting for all.” As per Section 9 of the Act, the firm’s “partners are bound to carry on the business of the firm to greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner, his heir or legal representative.”
Partnership firm is formed on the basis of a ‘Registered Partnership Deed’, which is a written document where the terms and conditions which have been mutually agreed on, by all the partners, are mentioned. The existence of the partnership deed directly impacts the existence of the partnership firm i.e., if the partnership deed ceases to exist due to any reason, the partnership firm will get dissolved immediately.
To form a partnership firm, a minimum of 2 individuals are required. The Partnership Act does not lay down any limit regarding the maximum number of partners in a partnership firm. However, as per the Rule 10 of The Companies (Miscellaneous) Rules, 2014, the maximum number of partners in any firm is fixed at 50. If a partnership firm has only 2 partners, death of either of them will result in the firm’s dissolution even if there is a contract stating the contrary.
What is a Partnership Registration?
Partnership registration is the process of the registration of the partnership firm by all the partners with the Registrar of Firms (RoF). The partners should get their firm registered with the RoF located in the same state as the firm. However, it is not compulsory to register a partnership firm as per the Indian Partnership Act, 1932, since the firm does not have a separate legal entity. This is a completely optional step.
For the sake of partnership registration, two or more individuals must come together as partners and agree on a firm name and ultimately, enter into a partnership deed.
How to become a Partner in a Partnership Firm?
As per the Partnership Act, 1932, any individual/entity/LLP who is competent to contract can become a partner in a partnership firm. The Act allows for a broad spectrum of individuals to engage in a partnership since it does not put any restrictions based on their gender, race, religion or nationality.
An individual or entity can only become a partner in a partnership firm if they are one of the following:
- Individual: The individual should be of sound mind, reached the adult age, not an undercharged insolvent, and not disqualified from by the law to enter into a contract can be a partnership firm’s partner.
- Firm: A registered partnership firm can legally become a partner in another existing partnership firm or any other business entity.
- Hindu Undivided Family (HUF): HUF’s Karta a male member who typically acts as a head of Hindu undivided family is eligible for becoming a partner in a partnership firm if he has contributed to the partnership firm through his self-acquired or personal skill and labor.
- Company: Since the companies are considered as ‘juristic persons’, they can become partners in a partnership firm, if their objects authorize them to do so.
- Trustees: Trustees of private religious trusts, family trusts, and Hindu mutts can enter into partnerships as long as their constitutions or objects allow them to do so.
The requirements for becoming a partner in a partnership firm is stated below:
- The person must be 18 years of age.
- A minor cannot become a partner in a firm. However, with the consent of all the partners for the time being, he may be admitted to the benefits of the partnership.
- Any person of sound mind and not disqualified by law from entering into a partnership contract is eligible to become a partner.
- A person who is not qualified to be a partner by the law may not become a partner.
- Individuals who want to become partners must comply with the legal requirements and regulations set forth by the Partnership Act, 1932.
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Types of Partners in a Partnership Firm
The following types of partners exist in a partnership firm:
- Active Partners: These partners become the partners of the firm through an agreement. They are actively involved in the firm’s day-to-day operations and business. When they want to retire, they need to provide a public notice for the same.
- Dormant or Sleeping Partner: This partner does not actively participate in the firm’s daily activities. However, he is bound by the actions of other partners. In case of retirement, a public notice for the same isn’t necessary. His capital contribution and profit-sharing is similar to the rest of the partners in the firm.
- Nominal Partner: This partner only lends his name to the firm as a partner and does not contribute to the firm’s capital. He does not have any share in the firm’s profit.
- Partner in Profit: This kind of partner only shares profits and is not liable for any losses faced by the firm.
- Minor Partner: A minor cannot enter into a contract for becoming a partner of a partnership firm. However, he is eligible for the firm’s benefits provided that all the partners have given their consent for the same.
Benefits of opening a Partnership Firm
The following are the benefits of opening a partnership firm:
Incorporation is easy
Compared to other business forms, the incorporation of a partnership firm is relatively easy. A partnership firm can be simply incorporated by drafting a partnership agreement and entering into a partnership agreement. No documents are required, except the partnership deed. It is not necessary to register a partnership firm with the registrar of firms. One can incorporate the firm now and then register it at a later date since the registration process is completely optional and is not mandatory by the law.
Less compliances compared to a Company/LLP
Compared to a company or an LLP, the partnership firm has to act in accordance with limited compliances. Company directors and LLP’s designated partners require a Digital Signature Certificate and DIN, but these formalities are not needed for a partnership firm. Changes under a partnership firm can be introduced easily. Although there are some legal restrictions on their activities which cannot be ignored. It is easy to dissolve a partnership firm since it does not require a lot of legal formalities.
Quick Decision-Making Process
Since there is no difference between ownership and management when it comes to a partnership firm, the process of decision making is a quick one. Once the partners make a decision together, the decision can be implemented in a quick and smooth manner. Under a partnership firm, the partners get to enjoy a wide range of powers and activities and in most cases, can even undertake certain transactions on the firm’s behalf without the requirement of other partners’ consent.
Equal Sharing of Profits and Losses between the Partners
The profits and losses of the partnership firm are shared equally between the partners. These partners have the liberty of deciding on the ratio of the profit and loss in the partnership firm. The profits and turnover of the firm is directly dependent on the work of the partners, so they have a sense of ownership and accountability.
Disadvantages of opening a Partnership Firm
Unlimited Liability of Partners
In a partnership firm, the partners have unlimited liability i.e., they have to bear the losses faced by the firm out of their personal assets. However, in case of a company or an LLP, the shareholders have liability which is limited to the extent of their shares. Even if one partner of the partnership firm creates a liability, all the partners of the firm have to borne it. If the firm’s assets are not enough for debt payment, the partners have to pay it off from their personal property.
Absence of Perpetual Succession in Partnership Firm
Perpetual succession refers to the continuation of a corporation’s existence despite the owner or member’s death, bankruptcy, insanity, change in membership or exit from business. However, in case of a partnership firm, perpetual succession is not applicable. This means that the partnership firm will be dissolved upon a partner’s death or insolvency of all the partners or if all but one of the partners become insolvent. If a partner gives a dissolution notice of the firm to the other partners, the firm can get dissolved anytime.
Difficulty in Raising Funds
Since there is no perpetual succession in a partnership firm and this firm does not have a status of a legal entity, raising capital is difficult compared to a company or an LLP. As the legal compliances aren’t very strict for a partnership firm, many people may not have faith in it. In addition to this, the firm’s accounts do not need to be published. So, it can be a really challenging task to borrow funds from third parties.
Conclusion
A partnership firm is a business entity which is established and regulated under the Indian Partnership Act, 1932. Section 4 of the Act defines a “Partnership” as a “relation amongst the partners who have agreed to share the profit of business carried on by all or any one of them acting for all.” As per Section 9 of the Act, the firm’s “partners are bound to carry on the business of the firm to greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner, his heir or legal representative.” If you need assistance in opening a partnership firm, feel free to get in touch with Registrationkraft’s team experts! We would be happy to help you and add you to our list of satisfied customers!