Partnership Firm

Partnership Firm

Partnership, in a layman language, refers to the coming together of two or more people to carry out a certain task. In the corporate structure of India, the Indian Partnership Act (1932) (referred to as Act hereafter), defines partnership as “the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” In a proprietary business an individual has constraints on the ability, skill and capital to run the business, besides liability that can occur anytime.

Advantages of Partnership Firm

  • Easy to Incorporate: The incorporation of a partnership firm is easy as compared to the other forms of business organisations. The partnership firm can be incorporated by drafting the partnership deed and entering into the partnership agreement. It need not even be registered with the Registrar of Firms initially.
  • Less Compliances: The partnership 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), Director Identification Number (DIN), which is required for the company directors or designated partners of an LLP. The dissolution of the partnership firm is easy and does not involve many legal formalities.
  • Quick Decision: 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.
  • Sharing of Profits and Losses: The partners share the profits and losses of the firm equally or as per the agreed ratio in the partnership deed. They have a sense of ownership and accountability, thereby reducing the burden of loss on one partner.

Disadvantages of Partnership Firm

  • Unlimited Liability: The partners have unlimited liability, which means they are personally liable for the debts and obligations of the partnership firm. Their personal assets can be used to settle business debts.
  • No Perpetual Succession: The partnership firm does not have perpetual succession, as it comes to an end upon the death or insolvency of a partner, unless the partnership deed provides otherwise.
  • Limited Resources: The maximum number of partners in a partnership firm is 20, limiting the capital that can be invested in the firm. This restricts the firm’s ability to undertake large-scale business activities.
  • Difficult to Raise Funds: Since the partnership firm does not have a separate legal entity and perpetual succession, it is difficult to raise capital from external sources like venture capitalists or through public offerings.

How to Register as a Partnership Firm?

It is easy to form a partnership firm in India. A partnership firm can be registered under the Indian Partnership Act, 1932 by submitting an application to the Registrar of Firms in the region where the business is located. Here are the steps involved:

  1. Choose a name for the partnership firm.
  2. Draft a Partnership Deed specifying the details of the firm, partners, business nature, profit/loss sharing ratio, etc.
  3. Apply for a PAN Card in the Partnership Name.
  4. File a Registration Application with the Registrar of Firms along with necessary documents.
  5. Submit the required documents and pay the registration fees.
  6. Finalize the Partnership Deed by signing it in front of a notary.
  7. Obtain Certification from the Registrar of Firms.

A partnership firm is not a separate legal entity, and its existence is based on the partnership deed. It is advisable to have a written partnership deed to avoid any future conflicts among partners.

Types of Partnership Firms

  • Active or Working Partner
  • Dormant or Sleeping Partners
  • General Partnership
  • Limited Liability Partnership (LLP)
  • Nominal Partner
  • Partner by estoppel or holding out
  • Partner in profits only

FAQs on Partnership Firm Registration

How much time does it take to register a partnership firm?
The registration of a Partnership Firm in India can take up to 12 to 14 working days.
Are there any grounds on which my partnership can be invalid?
If the partnership agreement is not registered or if the business objective is illegal, the partnership can be deemed invalid.
Can my certificate of registration be cancelled?
Yes, a partnership firm's registration can be cancelled, especially for reasons like all partners being declared insolvent or engaging in unlawful activities.
What are the fees for partnership firm registration in India?
The registration fee for a partnership firm is approximately Rs. 3000, varying based on the state regulations and nature of business.
Is it necessary to draft a Partnership deed?
Yes, a partnership deed is essential to define the rights, duties, and profit-sharing ratios among partners.

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