Great things in business are never done alone. They are accomplished as a team. Perhaps that is exactly why most businesses do not involve a single head alone but come together as partners to run it successfully.
Most start-ups in recent times are thus evolving as partnership firms. Predominantly, the business types in India are either proprietorship firms or partnership firms. Partnership firms are the most common ones among the two. Partnership firms in India are led by the Indian Partnership Act, 1932.
In a partnership firm, the odds of having a successful business are high. The partners share their business ideas and complement each other’s weaknesses. On the other hand, as in any business, there are chances that it may not do well as intended. Or even worse, the firm may not do well merely because of one or more partners. Under these circumstances, differences may arise and might call for legal action. It is for this reason that it is preferable to have the firm registered.
Benefits of Registering a Partnership Firm:
The advantages of registering a partnership firm are:
Potential to sue the firm or sue the other partners:
If any conflict should arise between the partners or between the current and previous partners or even between one of the partners and the firm itself, and provided the conflict thus arising is out of the terms dictated in the partnership deed or the dispute is upon the rights vested on the partner by virtue of the Partnership Act, then a partner belonging to the firm in which the partnership is registered can always move to the Courts of Law. This privilege is not given to a partner of an unregistered firm, although he can initiate a criminal proceeding against the wronged partner(s).
The capacity of the firm to sue third parties:
In a registered partnership firm, one or more partners can always file a case in court when any of their contracts are not honoured. Partners of an unregistered firm are not given this lenience.
Right to use the principle of set-Off:
If the partnership firm is issued by another party to recover a sum the firm owes to this party, the firm can use the principle of set-off against this third party provided the latter also owes some amount of money to the partnership firm. The registered partnership firm can simply counterbalance the amount it owes to the third party. This arrangement is not feasible in the case of unregistered partnership firms.
Despite the fact that the Partnership act renders both a registered and unregistered firm legal, it is a, sure enough, case that a registered partnership firm looks more credible in the eyes of a potential client.
Ability to convert into an entity:
A registered partnership firm always has the ease of converting itself to another corporate entity like that of a Limited Liability Partnership (LLP) or a private company. This ease of conversion is not bestowed upon an unregistered firm.
Procedure to register a partnership firm:
When the partners decide to register their firm, the foremost thing they should be ready with is a partnership deed. The deed shall be drafted as prescribed in the Indian Partnership Act, 1932. Depending upon the business and the terms and conditions between the partners the deed can be finalised. A deed delineates various elements that are critical to run a successful business, such as salaries to be given, allocation of profit and loss, interest on capital, exit strategies etc.,
Execution of partnership deed:
Once the existing partners have a consensus over the drafted deed, the next course of action would be to execute the deed by paying the stipulated stamp duty. The stamp duty depends on the state where the deed is getting registered. It is also imperative that the deed should be notarized. The deed should be duly signed by all the partners. Additionally, the signature of the witnesses also shall be captured in the partnership deed.
Stamp duty and notary procedure:
The execution of the partnership deed surfaces up once the stamp duty payments are made as directed by the Stamp Act of the respective state where the business of the firm is stationed. The execution of the deed can be done either on a non-judicial stamp paper or by means of franking. The main difference between stamping and franking is that while stamp duty signifies the legality of the documents. It is the franking implies that charges or taxes such as stamp duty has been deposited. In franking, payment is made through the banks and it is comparable to a stamp paper. Once the stamp duty is paid, the signatures of the partners and the respective witnesses are obtained, the deed is notarized.
Obtaining a PAN for the partnership firm:
A Permanent Account Number (PAN) can be applied either before or after the registration of the said partnership firm. The same can be done both in online and offline modes. While making an application for registering the partnership firm, most of the states, give the provision to apply for PAN. The application for PAN shall be substantiated with a supporting copy of the partnership deed.
Partnership deed registration:
The Registration of the firm is done with the Registrar of Firms (RoF), in whose jurisdiction the partnership firm is situated. Details such as the firm’s name, names of the partners and their respective contact details, place of business, the time frame during which the business was active etc are furnished within the application form. The Registrar can demand the submission of documents and proofs as required and the partners are required to provide the same.
Opening of a bank account
The sole purpose of the partnership firm is to carry out a commercial activity most often. Therefore, it is evident that the business requires a bank account to carry out the daily activities on behalf of the firm. A current account is therefore initiated in the name of the firm. All the required documents pertaining to the partnership firm are submitted to the bank.
Although the Indian Partnership Act, 1932 does not mandate that a partnership firm needs to be registered. The Act mentions that the firm can any time get itself registered after its incorporation. Except that, an application for registration cannot be made after a third party has commenced a suit against the partnership firm. Although a partnership firm is begun with the best possible optimism initially, the entering partners should be practical and be clever enough to foresee the necessary evil and take informed decisions by registering their partnership firm.