Partnership Firm

Is Partnership Registration Mandatory?

Are you considering forming an association of persons with a profit motive? Is a partnership on the books? If so, are you wondering whether partnership registration is mandatory? Keep reading to find out.

In India, there is no need to do partnership registration. Hence the short answer is NO, as specified under part VII of the Indian Partnership Act, 1932. However, as you would expect, this isn’t the whole picture if you’re looking to start a partnership firm.

Partnership registration is optional, and it is up to the partners whether or not to register the partnership firm. However, a partnership firm cannot obtain legal benefits unless it is registered, thus it is always desirable to register it.

There are several compelling reasons to register the Partnership deed. One reason is that unregistered entities face significant limitations in the legal execution of the partnership deed. But first, let’s brush up on our basics.

What Is a Partnership?

A partnership firm is a popular form of a business model for those entities that are owned, managed, and controlled by an Association of People for profit. Partnership firms are relatively easy to start and extremely popular among small and medium-sized businesses in the unorganised sectors.

Advantages of a Partnership

Easy to Start

A partnership is easy to form as no cumbersome legal formalities are involved. Its registration is also not essential. However, if the firm is not registered, it will be deprived of certain legal benefits. The Registrar of Firms is responsible for registering partnership firms.

Business Name

Since the name of a partnership firm is not registered, a Partnership firm can choose to have any name. But it should not infringe on a Registered trademark. However, since the name is not registered, any other person can also use the same business name unless trademark registration is obtained.

Annual Filing Is NOT Required

Limited Liability Partnerships and companies are required to file their annual accounts with the Registrar of Companies each year. A partnership firm is not required to file its annual accounts with the Registrar each year.  

Advantages of Partnership Registration

A partnership firm is one of the most preferred means of starting a business in India because of its simplicity. You can come to an agreement on matters of importance (profit-sharing, etc) and put it on paper. Once it is signed, that’s about it; you’re in business. However, registering the partnership agreement is an additional step that you should complete given the following advantages they offer.

Capacity to Sue the Firm:

A partner in an unregistered firm cannot file a suit against said firm or their partners to enforce any rights arising from the contract. This also includes rights conferred by the Partnership Act. Unless the partner’s name is entered into the Register of Firms. This happens during partnership registration. 

Now, imagine that you have invested some amount in an unregistered firm and you would like to withdraw from it, or want to question a suspicious deal any of the other partners have made. While you can question them all the same, there is no way you can take them to court, since your firm does not have a valid agreement. 

The unregistered agreement that you have signed to start the firm, simply won’t be enough to file a lawsuit.

Capacity to Sue Others:

An unregistered firm cannot file a suit against a third party to enforce a right arising from a contract unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.

Ability to Claim a Set-Off:

As part of an unregistered firm, you, your partners, or the firm cannot claim a set-off (this refers to a mutual adjustment of debts owed) in a dispute with a third party.

Can Be Undertaken Any Time:

For the above-mentioned reasons, partnerships do prefer to get registered at one point or the other. So, yes, there is no need to register the partnership deed when the business is formed. Fortunately, as per Section 58 of the Act, registration can be done at any time via an application to the Registrar of Firms: https://rof.mahaonline.gov.in/ having jurisdiction where the firm is situated or proposed to be situated.

Essential Clauses in a Partnership Deed

Profit-sharing clause: This indicates how the partners in the firm will divide profits and absorb losses, whether equally or unequally. One partner might be a working partner, wherein they have not contributed to the initial capital, and hence, will take a lesser or a percentage of profit, while the others might have put in more capital and, therefore, may get more. A detailed account can be put in the clause, to alleviate legal issues at a later stage.

Capital contribution clause: This clause states the amount of capital brought into the firm by each partner. It also states what it is to be used for and whether the capital will be repaid on exiting the firm. Here again, the capital contribution needs to be defined accurately against the name of each partner, along with the proposed utilisation of the same. If it is an equal capital partnership, the same should also be mentioned.

Dispute resolution clause: You may also state that any legal disputes will be settled through mediation or arbitration. One can put in as many clauses under this as possible (since everything needs to be predetermined or pre-meditated) to make it legally binding.

Retirement/termination clause: This particular clause states the conditions that need to be fulfilled for the termination of a partner or the retirement age and the consequences of either.

In case of termination, the clause should indicate why and how a partner will be terminated (illegal transactions, acting against the deed, and so on.) Also, the clause must also state what a person who wants to get out of the partnership is required to do if the capital will be returned, and so on.

The Takeaway

While the above-mentioned clauses are essential in every Partnership deed, every partnership is not the same. Therefore, you need a customised partnership deed to best protect your business interests. Get in touch with the experts at Vakilsearch right away, and get your very own tailor-made partnership deed! We also help you with partnership registration.

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