Online Partnership Firm Registration in India
A partnership firm stands as one of the fundamental forms of business organization, widely adopted in India. It necessitates the collaboration of at least two individuals. Forming a partnership involves two or more people joining hands to establish a business and share profits based on mutually agreed ratios. Partnership business encompasses various trades, occupations, or professions.
Partnership Firm Registration entails the formal registration of the partnership firm with the Registrar of Firms by its partners. This process mandates partners to register their firm with the Registrar of Firms in the state where it operates. While partnership firm registration is not compulsory, partners have the option to register the partnership firm either upon its formation or subsequently during its operation.
To initiate partnership registration, partners must assemble, agree on a firm name, and execute a partnership deed. However, partners cannot include members of a Hindu Undivided Family or spouses.
In India, partnership firms are governed and regulated by the Indian Partnership Act, 1932. Partners are the individuals collaborating to establish the partnership firm, and the partnership firm is founded upon a contract between them. This contractual agreement, known as a partnership deed, delineates the relationship among partners and the operations of the partnership firm.
What is a Partnership Firm?
A partnership is a collaborative arrangement between two individuals who have agreed to share the profits generated from a business conducted by any or all of them, as outlined in Section 4 of the Indian Partnership Act. Therefore, a partnership comprises three key elements:
- Agreement between Individuals: The partnership must result from an agreement between two or more individuals.
- Business Operation by Partners: The business or company must be managed by any or all of the partners representing the others.
- Profit Sharing Agreement: The agreement must outline the distribution of business profits among the partners.
Importance of Registering a Partnership Firm in India
Under the Indian Partnership Act, registration of a partnership firm is discretionary rather than mandatory. It is entirely up to the partners and is voluntary. The partnership firm can be registered at its inception or at any point during its operation.
However, opting to register the partnership firm is usually advisable as a registered partnership firm enjoys additional rights and benefits compared to unregistered firms. The advantages of registering a partnership firm include:
- Legal Recourse for Partners: A partner can initiate legal action against another partner or the partnership firm to enforce contractual rights. In contrast, partners in an unregistered partnership firm cannot sue the firm or other partners to enforce their rights.
- Litigation against Third Parties: A registered partnership firm can initiate legal proceedings against third parties to enforce contractual rights. Conversely, an unregistered firm lacks the ability to file a lawsuit against a third party to enforce its rights, although any third party can sue the unregistered firm.
- Entitlement to Legal Remedies: A registered firm can seek legal remedies, such as set-off, to enforce contractual entitlements. On the other hand, an unregistered firm cannot claim set-off in any proceedings brought against it.
Advantages of Registering a Partnership Firm
Registering a partnership firm in India offers several benefits:
- Ease of Formation: Compared to other business entities, forming a partnership firm is straightforward. Simply drafting a partnership deed and entering into an agreement is sufficient to establish the firm. No additional documents are required apart from the partnership agreement. Registration with the Registrar of Firms is optional, and a partnership firm can be created and registered later if needed.
- Reduced Compliance Burden: A partnership firm is subject to fewer regulations compared to corporations or LLPs. Partners are not obligated to obtain a Digital Signature Certificate (DSC) or a Director Identification Number (DIN), which are necessary for LLP directors or designated partners. Partners can easily implement any changes to the business, and dissolution of the firm involves minimal legal formalities.
- Swift Decision-Making: In a partnership firm, where ownership and management are not distinct, decision-making is rapid. Partners collectively make decisions, which can be promptly executed. Partners hold extensive authority and can conduct transactions on behalf of the firm without the consent of other partners.
- Profit and Loss Sharing: Partners evenly distribute the firm’s profits and losses. They can also establish their own profit and loss sharing ratios within the partnership. This sense of ownership and accountability motivates partners to contribute to the firm’s success. Losses incurred by the firm are shared equally or as per the terms of the partnership deed, mitigating individual partners’ financial burdens. Partners are jointly and severally liable for the firm’s activities.
Drawbacks of Partnership Firm Registration
Registering a partnership firm comes with several drawbacks:
- Unlimited Liability: Perhaps the most significant disadvantage is the unlimited liability borne by partners. In the event of the firm’s losses, partners are personally liable, risking their personal assets. This is in stark contrast to corporations or LLPs where shareholder or partner liability is limited to their investment.
- Lack of Perpetual Succession: Unlike corporations or LLPs, partnership firms lack perpetual succession. The death or insolvency of a partner, or even a partner’s decision to dissolve the firm, can bring about its termination at any time.
- Limited Resources: Partnership firms are constrained by a maximum of 20 partners, limiting the capital injection into the business. With capital being the sum of individual partner investments, the firm’s resources remain restricted, impeding large-scale project pursuits.
- Difficulty in Fundraising: Due to the absence of perpetual succession and a distinct legal identity, raising capital becomes challenging. Partnership firms have fewer avenues for capital generation compared to companies or LLPs. Additionally, the absence of stringent legal requirements and the non-public nature of financial statements diminishes trust from potential investors, making external borrowing a cumbersome task.
Partnership Firm Registration Checklist in India
Here’s a crucial checklist for registering a partnership firm:
- Drafting a partnership agreement.
- Ensuring a minimum of two members as partners.
- Adhering to the maximum limit of twenty partners.
- Selecting a suitable name for the firm.
- Designating the principal place of business.
- Obtaining the firm’s PAN card and establishing a bank account.
Registration of a Partnership Firm in India: Essential Documents and Procedures
To register a partnership firm in India, several crucial documents are required, including:
- Application for registration of partnership (Form-1).
- Certified original copy of Partnership Deed.
- Specimen of an affidavit certifying all the details mentioned in the partnership deed and documents are correct.
- PAN Card and address proof of the partners.
- Proof of principal place of business of the firm (ownership documents or rental/lease agreement).
Registering a partnership firm offers various advantages over unregistered ones. These benefits include:
- Additional rights and benefits.
- Credibility and recognition in business dealings.
- Legal protection and dispute resolution mechanisms.
Once the necessary documents are submitted, and if the registrar is satisfied, the firm is registered in the Register of Firms, and a Certificate of Registration is issued. This register contains updated information on all registered firms and is accessible to the public for a fee.
Timeline for Partnership Firm Registration:
The registration process typically takes around 10 days, subject to departmental approval and response times.
Compliance after Partnership Firm Registration:
- Obtain PAN and TAN from the IT Department.
- File Income Tax Returns regardless of profit or loss.
- Taxation at a rate of 30% plus an additional income tax surcharge for registered partnership firms.
- Conduct a Tax Audit for firms with yearly revenue exceeding Rs. 100 lakhs.
- Register for GST online if annual income exceeds Rs. 40 lakhs (Rs. 20 lakhs for northeastern states) or if involved in specific business activities like e-commerce or export-import.
- Submit monthly, quarterly, and yearly GST returns and quarterly TDS returns.
- Obtain ESIC Registration and file EIC Returns as required by law.