Partnership Firm Formation

The Section 4 of Indian Partnership Act, 1932 states that a partnership 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. There are three essential elements of the partnership:

1. A partnership must be a result of an agreement between two or more individuals.

2.The agreement must be built to share the profits obtained from the business.

3.The business must be run by all or any of them representing the rest.

Coexistence of these conditions is important for a partnership to come into existence.

In a partnership form of business two or more persons co-own an organization and they agree to share the profits and losses of the organization. The members of partnership are called Partners, and collectively the organization is known as a partnership firm. The legal document called a partnership deed is used to establish a partnership firm.

According to the law, all the assets and liabilities of the partnership firm belong to the partners. To prevent future misunderstandings between the partners the partnership agreement must specifically state how much profits and losses will be distributed among the partners. Each partner in a partnership firm is allowed to conduct business on behalf of the others.

Given its low expenses, simplicity of setup, and lack of stringent compliance requirements, it makes sense for some businesses, such as home-based ones that are unlikely to go into debt to register themselves as partnership firms. General partnerships have an optional registration process. The partnership will be dissolved If the number of partners reduces from two after the partner’s death, incapacitation or resignation.

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Registered Vs Unregistered Firm

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According to the Indian Partnership Act,1937 , there are two types of Partnership, registered Partnership and unregistered Partnership. The Act does not require the Partnership Deed/Partnership Firm to register and in other words, does not require the Partnership Firm to register as a Firm. Therefore various partnership businesses exist as an unregistered partnership without having any impact on the business.

It is not mandatory to register a partnership firm hence there are no penalties for non-registration. A partnership firm can be registered subsequently after formation. However, as per section 69 of the Partnership Act, unregistered partnership firms have certain rights denied.

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 a contract shall 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. Therefore, it is advisable for any partnership to register sooner or later.
• An unregistered partnership firm cannot file a legal suit against any third party to impose a right arising out of a contract.
• Though, There are Some privileges Which Cannot be Deprived of Even if a Partnership Firm is Not Registered with the Registrar of Firms:
• A third party can sue even an unregistered partnership firm or any partner of such firm.
• Every partner has the right to sue for closure of the firm, accounts after closure and awareness of property after closure.

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Easy to Incorporate

Partnership firms are one of the easiest forms of organizational structures. In most of the cases only a partnership deed is required for starting a partnership firm. Hence, a partnership can be started on the same day. Unlike an LLP registration which takes 5-7 working days.

No Compliances

At the start of your business there would be no compliances with respect to registration of partnership. You can just focus on your business whereas in a private limited company, there are always some procedural compliances from the starting of a business.

Quick Decision-making process

Decision making is one of the most important and powerful aspects of an organization. Decision making in a partnership firm could be faster as there is no concept of the passing of resolutions.

Raising of Funds

A partnership firm can easily raise funds as there are multiple partners who can contribute unlike a proprietorship firm. Moreover, banks also sanctions credit facilities easily to a partnership firm.

Ownership and Accountability

Every individual partner is an owner in spite of shared ownership. Partners are united for a common purpose but their tasks might be varied in nature. Ownership creates a higher sense of accountability which helps organizations in their growth.

Following are the few documents required for the registration of partnership -

• Identity proof of partners (Aadhaar card)
• Passport size photograph of partners
• PAN card of partners
• Address proof of Business in case of Registered partnership
• (Utility bill like Electricity bill/ Gas bill/ Mobile or landline bill)

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• Nature of firm
• Nature of Business
• Name of the authorised partner
• Date of commencement of business
• Profit sharing ratio of partners

• Application for registration of partnership (Form 1)
• A certified original copy of partnership deed
• PAN Card of the partnership firm
• Proof of address of the partnership firm like ownership deed, lease and rent agreements, etc.
• PAN Cards and address proofs of all the partners