How to Start a PARTNERSHIP FIRM REGISTRATION

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An Overview of Partnership Firm Registration

The term "Partnership" may seem simple, but it holds significant legal and business meaning. In the corporate world, a partnership refers to a relationship or association between two or more individuals who mutually agree to start a business and share its profits and losses. This business structure can be managed collectively by all partners or by one partner acting on behalf of the others (Principal and Agent Relationship). Since it is established on legal terms, adherence to all relevant rules and regulations is crucial when registering a Partnership Firm. Typically, this structure is favored by startups, small businesses, or medium-sized enterprises, especially in the unorganized sectors.

What is a Partnership Firm?

A Partnership Firm is a type of business model governed by the Indian Partnership Act, 1932. This structure involves two or more individuals who collaborate to manage and operate a business according to the terms set out in the Partnership Deed. The Partnership Deed is a critical document, often regarded as the "Magna Carta" of the firm, which outlines the roles, responsibilities, profit-sharing ratio, nature of work, and other important details concerning the partnership.

Benefits of Partnership Firm Registration

The registration of a partnership firm offers several advantages, including:

  1. Faster Decision-Making: In a partnership firm, decision-making is generally quicker since there is no need for passing formal resolutions. All partners have a variety of powers and can often engage in transactions on behalf of the firm without needing the consent of other partners.

  2. Easy to Start: Setting up a partnership firm is simple and quick. In most cases, the only requirement is a Partnership Deed, which can be created on the same day as the registration. This makes it a convenient option for entrepreneurs.

  3. Easier Fundraising: Partnerships have a more flexible ability to raise funds since multiple partners can contribute to the firm's capital. Additionally, banks tend to be more willing to extend credit facilities to partnership firms compared to sole proprietorships.

  4. Lower Compliance Requirements: Compared to Limited Liability Partnerships (LLPs) or companies, partnership firms have relatively fewer regulatory obligations. There is no need for Digital Signature Certificates (DSC) or Director Identification Numbers (DIN) as required for LLPs or companies. This makes the process cost-effective, as both registration and ongoing compliance are cheaper.

  5. Shared Profits and Losses: In a partnership, the profits and losses are typically shared among the partners according to the agreed ratio in the Partnership Deed. This distribution ensures that no single partner bears the full burden of losses. The partners also have a sense of ownership and accountability, which is crucial for the firm’s growth and success.

Types of Partnership Firms in India

A partnership firm can be categorized into the following types:

  1. General Partnership
    A general partnership involves all partners actively participating in managing the business and sharing equal responsibility for its operations, profits, and losses.

  2. Partnership at Will
    In a partnership at will, there is no specified duration for the partnership. It continues until any partner decides to dissolve it, as long as the decision is mutual or based on the partnership agreement.

  3. Particular Partnership
    This type of partnership is created for a specific purpose or project. Once the objective is completed or the contract ends, the partnership is dissolved. However, the partners may choose to continue the partnership by amending their agreement.

Based on Registration:

  1. Registered Partnership
    A partnership that is formally registered with the Registrar under the Indian Partnership Act, 1932 is considered a registered partnership. This provides legal recognition and more protection for the firm and its partners.

  2. Unregistered Partnership
    In an unregistered partnership, the partners only execute an agreement among themselves but do not get the partnership officially registered. While registration is not mandatory, it is advisable to do so as it provides legal advantages, such as the ability to file suits against third parties. Partners in an unregistered firm cannot sue other partners or third parties in a court of law.

Checklist for Partnership Firm Registration:

  • Drafting the Partnership Deed.
  • Choosing a unique and appropriate name for the firm.
  • A minimum of 2 partners and a maximum of 20 partners.
  • Deciding on the principal place of business.
  • Opening a bank account and obtaining a PAN Card for the firm.

By following this checklist and completing the necessary formalities, you can efficiently register your partnership firm and enjoy the associated benefits.

 
 
 

Documents Required for Partnership Firm Registration

The following documents are essential for registering a partnership firm:

  1. Application Form-1: This form is required for the registration of the partnership firm.

  2. Certified Original Copy of the Partnership Deed: A signed and notarized copy of the partnership deed outlining the rights, duties, profit-sharing ratio, and other terms of the partnership.

  3. Address Proof and PAN Card of the Partners: Valid proof of address (such as utility bills, Aadhar card, or passport) and a copy of the PAN card for each partner.

  4. Affidavit: A specimen affidavit confirming that all the details mentioned in the partnership deed and other submitted documents are accurate.

  5. Proof of Principal Place of Business: Documents showing the ownership or lease/rental agreement for the business premises, which serves as the principal place of business for the firm.

Note: Once the Registrar verifies and is satisfied with the submitted documents, the partnership firm will be officially registered in the Register of Firms, and a Certificate of Registration will be issued.

Procedure for Partnership Firm Registration

The following listed are the steps involved in the procedure of partnership registration:

  • Choose a Unique name for the Firm

The first and foremost step is to select a unique name for the Partnership Firm. Further, the name must not only be unique but should not include words such as the emperor, empire, crown, empress, etc., which show some sort of approval or sanction from the government. Furthermore, the selected name must not be similar to the name of any existing firm engaged in the same nature of business.

  • File an Application for the Registration

In the second step, the partners of the partnership firm are required to file an application for the Registration of the partnership firm in Form 1. Further, the said application is filed with the Registrar of Firm (RoF) of the concerned state where the Firm is situated. Further, it is relevant to note that the application is required to be filed in the prescribed format, together with the specified fees.

  • Preparation of a Partnership Deed

In the next step, all the partners are mutually required to draft a partnership deed on a stamp paper. Further, a partnership deed can be both oral and written. However, it is always suggested and advisable to draft a partnership deed as it eradicates or minimizes the chance of any future conflict.

  • Submission of the Documents

Thereafter, partners are required to submit all the prerequisite documents together with the drafted partnership deed.

  • Verification

Further, once all the documents submitted and the application filed is closely verified by the authorities, and if no objection is found, then a Certificate of Registration will be issued to the said partnership firm.

Cancellation of Partnership Registration

A Partnership Registration can be canceled, often referred to as dissolution of the partnership. Dissolution may occur under certain circumstances, including:

  1. Insolvency of Partners: If all partners except one are declared insolvent, the partnership may be dissolved.

  2. Illegal Activities: If the partnership is engaged in unlawful activities, such as trading in illegal products (e.g., drugs), corporate mismanagement, or conducting business with countries that pose a threat to India's interests, the registration can be canceled.

In such cases, the partnership firm is legally dissolved, and its registration is canceled.

Is Partnership Firm Registration Compulsory?

No, registering a Partnership Firm is not compulsory; it is optional for the partners. However, it is strongly recommended to register the partnership firm under the Indian Partnership Act, 1932. A registered partnership firm enjoys several benefits, rights, and privileges that are unavailable to an unregistered partnership.

Key Elements of a Partnership Deed

A Partnership Deed is a formal agreement between partners that outlines the operational framework of the partnership firm. While a partnership deed can be oral, it is highly advisable to draft it in writing to avoid future disputes. Below are the key components to include in a Partnership Deed:

  • Firm and Partner Details: Name, address, and details of the partners
  • Nature of Business: The type of business the partnership will engage in
  • Capital Contribution: Capital invested by each partner
  • Profit and Loss Sharing: The ratio in which profits and losses will be shared
  • Interest on Capital: Details regarding interest payable on the capital invested by partners
  • Partner Drawings/Loans: Terms regarding any drawings or loans provided by partners
  • Salaries/Commissions: Any payments due to partners, such as salary or commission
  • Rights and Duties: The roles and responsibilities of each partner
  • Retirement, Death, or Incapacity: The process to follow in case a partner retires, passes away, or becomes incapacitated
  • Other Agreed Clauses: Any additional mutually agreed terms

For registration, the Partnership Deed must be notarized and stamped as per the relevant legal provisions.

Consequences of Not Registering a Partnership Firm

If a partnership firm is not registered, the partners lose the right to enforce any provisions under the Indian Partnership Act, 1932. Specifically:

  • No Legal Recourse Against Third Parties: The firm cannot file a suit or claim a set-off in disputes with third parties.
  • Vulnerability to Third-Party Claims: While the firm cannot sue, third parties can take legal action against the unregistered partnership.

Tax Compliances Post-Registration of a Partnership Firm

After registering the partnership firm, the following tax compliances are necessary:

  1. PAN and TAN: The partnership must obtain a PAN (Permanent Account Number) and a TAN (Tax Deduction Account Number) from the Income Tax Department.
  2. Income Tax Return: The partnership is required to file an Income Tax Return (ITR) annually, regardless of profit or loss. The tax rate on the total income is 30%, plus a surcharge.
  3. Tax Audit: If the partnership’s annual turnover exceeds Rs. 100 lakhs, a tax audit is mandatory.
  4. GST Registration: If the business turnover exceeds Rs. 40 lakhs (Rs. 20 lakhs for North-Eastern states), GST registration is required. Additionally, businesses involved in Export-Import, E-commerce, or as Market Place Aggregators must register for GST regardless of turnover.
  5. GST Returns: After GST registration, the firm must file monthly, quarterly, and annual GST returns.
  6. TDS Filing: Partnership firms with a TAN must file quarterly TDS returns, following the applicable TDS rules.
  7. ESIC Registration: If applicable, the partnership firm must obtain ESIC (Employee State Insurance Corporation) registration and file ESIC returns.

By following these compliance steps, the partnership firm can avoid legal penalties and ensure smooth operation within the framework of Indian business laws.