The partnership company registration process law relating to partnership firms in India is prescribed in the Indian Partnership Act of 1932. This Act lays down the rights and duties of the partners between themselves and other legal relations between partners and third persons, which are incidental to the formation of a partnership. Thus, the Act establishes the position of a partner as well as a partnership firm vis-à-vis third parties, in legal and contractual relations arising out of and in the course of the business of a partnership firm. In this article, we look at the various aspects of running a partnership firm in India in detail.
A Partnership company registration process is a relationship between individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all as stated in Section 4 of the Indian Partnership Act. Therefore, a partnership consists of three essential elements.
- A party must be a result of an agreement between two or more individuals.
- The agreement must be built to share the profits obtained from the business.
- The business must be run by all or any of them representing the rest.
All these conditions must coexist before a partnership can come into existence.
Partnership company Elements of the registration process
Some key elements are require for the formation of a Partnership. They are list below with a brief explanation.
A partnership company registration process is the result of an agreement between two or more persons. It should be note that this sort of deal can arise only from a contract and not from status. This is why a partnership is distinguishable from a Hindu Undivided Family carrying on the family business. The reason is that this kind of alliance is a creation only out of a mutual agreement. Thus, the nature of a partnership is voluntary and contractual.
Sharing Profit of Business
Firstly, there must be a business that exists. For this purpose, the term ‘business’ would generally mean every trade, occupation, and profession. The existence of a company is crucial. The motive of a business is the “acquisition of gains” that lead to the formation of a partnership. So, there can be no partnership where there is no intention to carry on a business and to share the profits obtained from the same. For example, co-owners who share the rent derived from a piece of land are not considered partners as a business does not exist. Similarly
Running the Business
The parent company registration process’s third requirement for a partnership is that the business must be carry on by all the partners or by one or more of the partners acting for all. This is the crucial principle of the partnership law. An act of one partner in the course of the business of the firm is, in fact, an act of all partners. A partner carrying on a business is the principal as well as the agent for all the other partners. Therefore, it should be noted that the real test of a partnership is a mutual agency rather than sharing of profits. If the element of interactive agency is absent, then there will be no partnership.
The distinction between Partnership and Firm
Individuals who have entered into a partnership with one another are called Partners individually. The partners may be called collectively as the name under which the business is carried on is called the name of the Firm. A partnership is merely an abstract legal relationship between the partners. A firm is a concrete object signifying the collective entity for all the partners. Thus, a partnership is an invisible bind that holds the partner together, and a firm is the visible form of this partnership which is, therefore, bound together.
Types of Partnership Company
There are partnership company registration processes and two types of partnership which are as follows.
Partnership at will
A Partnership company registration process by will is a partnership where there is no provision made by contract between the partners for the duration of their partnership, or the determination of their partnership.
partnership company registration process particular partnership is when a person becomes a partner with another individual in a particular business enterprise or for a particular business venture or undertaking, such as the construction of a road, laying a railway line, etc. This sort of partnership shall come to an end on the completion of the task for which it was initially formed.
Types of Partners
The different classes of partners can be derived based on the extent of liability in a partnership firm.
Active/ Actual/ Ostensible Partner
When a partner of a partnership firm,
- has become a partner by an agreement.
- actively participates in the conduct of the partnership.
The partner of the firm acts as a representative of other partners for all the acts carried out in the usual business lifecycle of the business. In the event of a retirement of a partner, the person must give public notice to absolve himself of their liabilities for acts carried out by the other partners after his retirement.
Sleeping or Dormant Partner
A Sleeping or a Dormant Partner is a partner
- who is a partner by agreement;
- who does not actively take part in the conduct of the business?
These partners share their profits and losses and are liable to third parties for the business carried out by the partnership firm. However, they are not required to give public notice of their retirement from the partnership firm.
A nominal partner is an individual who lends his name to the partnership form. When this is done without having any real interest in the business, the person is a nominal partner. This kind of partner is not entitled to share the profits of the firm. This partner has neither invested in the firm nor taken part in how the business is run at the firm. Although, such a partner is liable to third parties for all the actions taken by the firm.
Partner in Profits only
This is a partner who is entitled to have a share of the profits without being liable for the losses. This kind of partner is liable to third parties only for acts of gain.
A Sub-partner is a partner in a partnership firm who agrees to share his profits in the partnership firm with an outsider to the firm. A sub-partner does not hold any right against the firm nor is liable for any debts caused by the firm.
Sub-partner is a partner in a partnership firm who agrees to share his profits in the partnership firm with an outsider to the firm. A sub-partner does not hold any right against the firm nor is liable for any debts caused by the firm.
This is a partner who is admitted as a partner into an already existing firm with the consent of all the other existing partners. Such a partner is not liable for any acts of the form taken before his entry as a partner to the firm.
An outgoing partner is a partner who leaves the firm in which the rest of the partners continue to carry on the business. Such a partner remains liable to third parties for all the actions taken by the firm until a public notice concerning his retirement is given.
Partner by holding out
A Partnership company registration by holding out is also called a partnership by estoppel. This is when an individual holds himself out as a partner or allows others to do so, the person is then stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. When an individual represents himself or knowingly permits himself, to be represented as a partner in a partnership firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the faith of such representation, had given credit to the firm.
Partnerships vs. Company
|A firm is not a legal entity. Therefore, it has no legal identity distinct from the personalities of its constituent members.
|A company is considered a separate legal entity distinct from its members.
|In a firm, all the partners are an agent for each other, as well as for the firm.
|In a company, a member is not an agent of any other member or the company. A member’s actions do not bind either.
Partnership VS. Club
|A partnership is an association of individuals formed for earning profits from a business run by all or one representing the actions of all.
|A club is an association of individuals with the objective not of earning a profit, but of promoting a beneficial purpose such as improvement of health or providing recreation for its members and so on.
|Individuals forming a partnership are called partners. A partner is an agent for all the other partners.
|Individuals forming a club are called its members. A member of the club is not the agent of any other member in the same club.
Partnership VS. Hindu Undivided Family
|Hindu Undivided Family
|Mode of creation
|A partnership is created through an agreement.
|The right to a Hindu Undivided Family is formed by status. It is created by birth into such a family.
|Death of a member
|The death of a partner in the firm would lead to the dissolution of the partnership.
|The death of a family member in a HUF does not end in the dissolution of the family business.
Partnership company Firm Registration FAQs
What is the registration of a partnership?
Registration of partnership in India is legally formalizing a partnership firm by filing an application with the Registrar of Firms under the Indian Partnership Act, 1932. The registration process involves providing details about the partnership firm, such as its name, location, partners’ details, and the terms and conditions of the partnership agreement.
Is it compulsory to register a partnership?
Registration of a partner to a partnership firm is not compulsory in India. However, if a new partner joins the partnership firm, the partnership deed should be amended, and a supplementary agreement should be executed. While registration of partners is not required, the partnership firm must be registered with the Registrar of Firms under the Indian Partnership Act, 1932.
Who is eligible for partnership?
Under the Indian Partnership Act, the following Individual/entities are eligible to become partners in a partnership firm:
- Individual: Any person who is of sound mind, not a minor, not an undercharged insolvent, and not disqualified from entering into a contract by law can become a partner in a partnership firm.
- Firm: A registered partnership firm can become a partner in another partnership firm.
- Hindu Undivided Family (HUF): The Karta of a HUF can become a partner in a partnership firm in his capacity if he has contributed his self-acquired or personal skill and labor to the partnership firm.
How much capital is required to start a Partnership?
A Partnership firm can be started with any amount of capital. There is no minimum requirement as such.
What are the advantages of registering a Partnership firm?
It is very advisable to register a Partnership firm as a Registered Partnership Firm can file a suit in any court against any of the Partners or firms for the enforcement of any right arising from the contract referred by the Partnership Act. Also, only a Registered Partnership Firm can claim set-off or other proceedings in a dispute with a party.
Is a partnership firm a separate legal entity?
The Partnership firm and the partners are the same in the eyes of the law. In Partnership firms, the liability of the Partners is also unlimited and all the Partners are said to be jointly and severally liable for the liabilities of the firm. Hence, No Partnership firm doesn’t have separate legal existence of its own.
Easy to Incorporate
The partnership company registration incorporation of a partnership firm is easy as compared to the other forms of business organizations. The partnership firm can be incorporated by drafting the partnership deed and entering into the partnership agreement. Apart from the partnership deed, no other documents are required. It need not even be registered with the Registrar of Firms. A partnership firm can be incorporated and registered at a later date as registration is voluntary and not mandatory.
The Partnership company registration firm has to adhere to very few compliances as compared to a company or LLP. The partners do not need a Digital Signature Certificate (DSC), or Director Identification Number (DIN), which is required for the company directors or designated partners of an LLP. The partners can introduce any changes in the business easily. They do have legal restrictions on their activities. It is cost-effective, and the registration process is cheaper compared to a company or LLP. The dissolution of the partnership firm is easy and does not involve many legal formalities.
The decision-making process in a partnership firm is quick as there is no difference between ownership and management. All the decisions are taken by the partners together, and they can be implemented immediately. The partners have wide powers and activities which they can perform on behalf of the firm. They can even undertake certain transactions on behalf of the partnership firm without the consent of other partners.
Sharing of Profits and Losses
The partnership company registration partners share the profits and losses of the firm equally. They even have the liberty of deciding the profit and loss ratio in the partnership firm. Since the firm’s profits and turnover are dependent on their work, they have a sense of ownership and accountability. Any loss of the firm will be borne by them equally or according to the partnership deed ratio, thus reducing the burden of loss on one person or partner. They are liable jointly and severally for the activities of the firm.