In India the Partnership firm is a business entity created by persons who have agreed to share profits or loss of the business. Partnerships firm are a very good choice of business entity for small enterprises wherein two or more persons decides to contribute to a business and share the profits or losses.
Types of Partnership Firm
There are two types of Partnership firm, registered Partnership firm and unregistered Partnership firm. There are no penalties for non-registration of a partnership firm, and a partnership firm can even be registered after formation. However, unregistered partnership firms have certain rights denied in Section 69 of the Partnership Act, which deals with the effects of non-registration of a partnership firm.
Some of the disadvantages of an unregistered firm are:
- A partner of an unregistered firm cannot file a suit in any court against the firm or other partners for the enforcement of any right arising from a contract or right conferred by the Partnership Act.
- No suit to enforce a right arising from an agreement can be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered.
- An unregistered firm or any of its partners cannot claim set-off or other proceedings in a dispute with a third party.
Difference between LLP & Partnership Firm
Registration Cost: The cost for registration of LLP is normally higher than the cost for registration of a partnership firm.
Registration office: LLPs are registered in India under the Ministry of Corporate Affairs, Central Government. Partnership firms are registered with the Registrar of Firms, Controlled by the respective State Government in which the firm is registered.
Protection under Limited Liability: The main advantage of a Limited Liability Partnership over a traditional partnership firm is that in an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. An LLP also provides limited liability protection for the owners from the debts of the LLP. However, unlike private limited company shareholder, the partners of an LLP have the right to manage the business directly.
Number of Partners: LLPs and Partnership Firms must have a minimum of two partners to be registered. Post incorporation, an LLP can have unlimited partners. In case of a Partnership Firm, if the number of partners at any time reduces below the mandatory minimum of 2 due to death, incapacitation or resignation of a Partner, the partnership firm would stand dissolved. On the other hand, in case of an LLP, if the number of Partners reduces below 2, the sole Partner can still find a new Partner to fill the position without dissolution of the LLP.
Is it necessary to register a partnership firm?
Indian Partnership Act, 1932 governs the partnerships. Registration of partnership firm is optional and at the discretion of the partners.
Registration of partnership firm may be done at any time – before starting a business or anytime during the continuation of partnership.
It is always advisable to register the firm since a registered firms enjoy special rights which aren’t available to the unregistered firms.
Registration of Partnership Firm
Following details are required in a partnership deed:
A. General Details:
1. Name and address of the firm and all the partners
2. Nature of business
3. Date of starting of business Capital to be contributed by each partner
4. Capital to be contributed by each partner
5. Profit/loss sharing ratio among the partners
B. Specific Details:
Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a later stage:
1. Interest on capital invested, drawings by partners or any loans provided by partners to firm
2. Salaries, commissions or any other amount to be payable to partners
3. Rights of each partner, including additional rights to be enjoyed by the active partners
4. Duties and obligations of all partners
5. Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of firm.
6. Other clauses as partners may decide by mutual discussion
How to register the partnership firm?
An application form along with fees is to be submitted to Registrar of Firms of the State in which firm is situated. The application has to be signed by all partners or their agents.
Documents to be submitted to the Registrar
- Application for registration of partnership (Form 1)
- Specimen of Affidavit
- Certified original copy of Partnership Deed
- Proof of principal place of business (ownership documents or rental/lease agreement)
If the registrar is satisfied with the documents, he will register the firm in Register of Firms and issue Certificate of Registration.
Register of Firms contains up-to-date information on all firms and can be viewed by anybody upon payment of certain fees
Advantages of a Partnership Firm
One of the main advantages of a Partnership Firm is that there are very minimal requirements in terms of compliance.
For instance, a Company or LLP requires the annual filing of its financial statements with the Registrar of Companies. Such documents filed with the MCA are also made public documents.
On the other hand, registered/unregistered Partnership Firms are not required to file any annual returns, and the financial statements of a partnership firm would NOT be made publicly available.
Also, the accounts of a registered / unregistered partnership firm are not required to be audited.
Whereas, the accounts of a Limited Liability Partnership (LLP) are required to be audited by a practising Chartered Accountant when the turnover exceeds Rs.40 lakhs per annum or when capital contribution exceeds Rs. 25 lakhs.
Disadvantages of a Partnership Firm
Partnership firm does not provide its Partners with limited liability protection and does not have perpetual existence. Also, the interest of a Partner in a Partnership firm is not easily transferable, and the ownership structure does not allow for investment from Angel Investors, Venture Capitalists or Private Equity Firms. Banks / Financial Institutions also prefer to lend to Companies than Partnership Firms as Companies are separate entities and the regulatory requirement for financial reporting of Companies – makes a company more transparent and structured.
