How to register a partnership in India? Part 3 of the Business Registration Series

India has several forms of business organization, but Partnership is the most prominent among them. A partnership happens when two or more individuals come together to conduct a business, from sharing responsibilities, profit, and loss equally among them they do it all together as the terms are specified in a partnership agreement. According to the Indian Partnership Act 1932, which regulates all the partnership firms in India, “Partnership is the legal arrangement where two or more people come to an arrangement to share the profits, losses, and responsibilities of a business carried on by all or any of them acting for all”. 

Elements of Partnership:

1. Agreement – is a legal document also called a partnership deed that is signed between all the individuals who decide to share all the responsibilities, profit, and losses of the business, it can be in an oral or written form. 

2. Profit Sharing – Under the partnership every individual is bound to share all the profits equally or in the respective ratio they agree upon. The same goes for losses too. 

3. Business Activity – In partnership non-profit activities are not appraised. The business should be fully lawful with the sole intention of generating profit. 

4. Mutual Agency – marks that every partner represents their firm as well as their fellow partner.

Potential Drawbacks To Not Registering Partnership

Although Indian law does not require the registration of a partnership firm, forming a partnership can result in significant disadvantages and limitations. One of the most important consequences is that an unregistered company has no legal recognition. Without official registration, the company does not have a legal entity independent of its partners.

This means that the company cannot sue or be sued in its name; all legal actions must be brought by or against the partners personally. This significantly limits the possibilities of the partnership to fulfill its rights and protect against the claims of third parties. Registering a vehicle, legal document, or business is an important safeguard against potential problems and disputes. Registration is an important precaution to avoid future problems and conflicts, whether it is a business, a car, or a legal document.

The resources available to partners of an unregistered company are limited. They shall not take any legal action to enforce any rights under the Indian Partnership Act, including rights relating to contractual disputes or winding up of the company.

As a result, partners have very few opportunities to use the legal system to resolve disputes or protect their rights. An unregistered company is also not visible to the public due to the lack of legal registration. Its data is not listed in any public register, which can prove problematic when dealing with other parties who question the reputation and legitimacy of the company. Lack of transparency can undermine trust and make doing business difficult.

Shareholders of an unincorporated company are also not protected by any proprietary laws in the Companies Act. This can make it difficult to transfer and manage company assets. Although registration is not required by law, failure to do so can have serious consequences. 

The partnership waives important legal guarantees, limits its ability to seek redress, and operates less publicly and with less credibility. For these reasons, experts generally recommend partnership firm registration in India, although registration is not required.

Need For Registration Of Partnership 

Registering a partnership is an important step that offers several advantages and legal guarantees, creating trust and stability in the business environment. First, registering a partnership gives it a legal identity that distinguishes it from its partners and enables it to enter into contracts, own property, and sue or be sued in its name. This difference in identity is critical to a company's reputation and long-term success. In addition, registration promotes transparency and accountability between partners. This requires documenting key aspects of the partnership, such as the capital stock, profit sharing, and the duties and responsibilities of each partner, which helps to avoid disagreements and misunderstandings. In the event of a conflict, the registered agreement serves as a legal document that clarifies the agreed parameters and helps resolve disputes. In addition, a registered partnership firm can take advantage of several government schemes and incentives designed to help businesses for which unregistered firms may not be eligible. Access to benefits can be essential to business growth and viability. In addition, banks and financial institutions are more likely to grant loans and credit facilities to registered businesses, as registration increases legitimacy and reduces lender risk. This increased availability of financial resources can significantly improve a company's ability to invest in growth and development.

Registration also brings financial benefits as the partnership firm can register its returns and be taxed separately from the individual partners, which can reduce the overall tax bill. It is worth noting that in some jurisdictions registration is required for certain types of business, which ensures that the company operates within the legal framework and meets all regulatory criteria. This compliance protects the company from legal consequences and at the same time improves its reputation among customers and partners. Finally, registering a partnership can provide continuity to the business because the death or retirement of a partner does not immediately break up the business. instead, it will continue to exist as a separate legal entity, allowing for seamless succession and business continuity. All in all, registering a partnership is a strategic decision that protects the interests of the partners, promotes compliance with the law, and lays the foundation for the future growth and stability of the company.

Types of Partnership in India

As the partnership firms in India are formed and operated under the Partnership Act of 1932. This act has divided partnership firms into various types.

1. General Partnership - In this type of partnership liability is unlimited for the partners, meaning that if in any circumstances a partner faces a financial loss in the firm their assets can be used to clear the debts as well as creditor’s claim. Also, in general partnership, every partner has the right to make decisions related to management as well as how the firm will be operated. It is further split up into two categories –

   1. Partnership at will - A partnership is created at will, with no specific deadlines set for its closure. This end of the partnership is based on the mutual understanding of the partners as and when the need arises. Therefore, the end of this type of partnership is not predetermined.

   2. Particular Partnerships - This type of partnership is entered with the end goal of carrying out a specific undertaking. These types of partnerships are formed specifically for a particular project that is temporary contract-based work or for specific business only. Once the objective of the business has been fulfilled the partnership is dissolved. However, the partnership can be continued if one of the partners is dismissed.
      

2. Limited Liability Partnership (LLP) - This type of partnership differs from a general partnership in that it is a commercial organization in the form of a company. The partner's liabilities are limited to the there share capital. This type of partnership is governed by the Limited Liability Partnership Act, of 2008. In LLP, the partners are not liable to clear the debts of the firm by using their assets in any form. Speaking of registration, Some, of the firms are renowned based on registration. Although it’s not mandatory they are categorized as registered and unregistered partnership firms.

   1. Unregistered Partnership Firms - are those firms that are established through the execution of an agreement between the partners. In this way, the business can be carried out in a stated manner that is provided in the given agreement.

   2. Registered partnership form – These are those forms that are required to be registered through the registrar of the form where they can receive the jurisdiction about the place where the business will be operated as well as will be located.
      

Hence, both types of firms are recognized by law equally but the registered one is more appreciated. They can enjoy all the benefits of being legally granted a firm because of their way of registration.

Process Of  Registering  A  Partnership

Select a partnership name – Partners are required to search a unique name for their firm that is available as well as does not defy any existing business name or trademark of any existing business.

Create a partnership deed – It is a legal document that is signed by all the partners involved in the partnership of the form. This document consists of all the duties, rights, and responsibilities that are required to be fulfilled by all the partners. They are also required to submit an affidavit that states that all the information is correct. This document consists of Information like

name and address of the partnership form, details of all the partners, description of the ongoing business activities, and terms as well as conditions of the partnership in the firm.

Profit and loss ratio, capital contribution by each partner, and powers that each partner holds on to.

procedure that is required to be followed for resolving any kind of dispute among partners and lastly the rules that are formed for the admission as well as retirement of any partner. All this information is described in this specific legal document called a partnership deed.

Implement the partnership deed – According to the Stamp Act of the respective states, the deeds are required to be executed on a non-judicial stamp paper of an appropriate value. Although it’s not mandatory it is advised to get the form partnership deed to be notarized.

PAN number requirement – Partners of the form are required to apply for a permanent account number (PAN) True through the official website or any PAN facilitation center. To get the permanent account number for the form applicant is required to submit a copy of their partnership deed, ID proof, their address on the form as well as details of all the partners.

Registration Fees - While registering the partnership firm the partners are required to pay the registration fees that will be mentioned by the registrar. There are no fixed fees, and it depends from state to state.

Acquire Certificate of Registration – After the registration all the documents are verified. After the verification, the registrar will issue a certificate of registration to the partners of the firm.

Registration of Bank Account – After the completion of all the documents partners are required to open a bank account on behalf of their partnership firm. Partnership deed, PAN card, the registration certificate (if available) are required to be submitted as the mandatory documents to open the bank account of the firm.

Apply for Licenses and Permits – Partners are required to apply for the necessary licenses and permits like GST registration or trademark. The license will depend on the nature of the business. Thus, it is called a business-specific license.

In conclusion, it is necessary to consult with any professional lawyer or consultant just to ensure that all the legal requirements are fulfilled and that a thorough partnership deed will be drafted.

Conclusion

This article consists of all the required information that is mandatory for anyone’s knowledge who is opening or thinking of opening a partnership firm. VCSME Ratings Private Limited provides its services in the registration of partnerships to a wide range of clients. For further information or assistance with your partnership, feel free to visit vcsme.in or contact us here.

Article written by Muskan Singhal