The Partnership Act, 1932, defines partnership as a relationship between two or more persons who agree to share the profits obtained while running the business and that the persons who have thus entered the partnership are called partners and when they are collectively referred to as a “firm”.
While the Company Act, 2013 mandates registration, the Partnership Act, doesn’t push the partnerships firms to do so. Even if a firm chooses not to be registered, it would still remain legal under the purview of the law. Get to know more details on the unregistered partnership firms.
Registration of a firm is considered to bring the firm into existence in the case of private companies. As mentioned, the same is not the case in partnership firms. Non-registration is when the firm does not go through the methods of getting incorporated. However, a registered partnership firm looks more credible to its customers and third parties.
In India, the consequences of non registration of a partnership firm are noteworthy. While registration is not mandatory, understanding the effects of non-registration of partnership firms is crucial.
Legal Recognition:
An unregistered partnership firm lacks legal recognition. Consequently, it cannot sue or be sued in its name, leading to a limited legal standing.
Restricted Legal Remedies:
Partners in an unregistered firm face limitations in seeking legal remedies. They cannot file suits related to contract rights or those conferred by the Partnership Act.
Absence of Public Visibility:
Unregistered firms lack public visibility as their details are not available in the public domain. This absence of public visibility can be a drawback in dealings with third parties.
Implications on Property Rights:
Partners in an unregistered firm do not benefit from specific provisions related to property transfer outlined in the Partnership Act, potentially complicating property dealings.
Tax Implications:
Unregistered firms may encounter tax-related issues, missing out on certain benefits and exemptions available to registered counterparts, resulting in a higher tax liability.
Credit Limitations:
Financial institutions may be hesitant to extend credit to unregistered firms, as registration is often perceived as a sign of authenticity and legal compliance.
Business Expansion Challenges:
Unregistered firms may face hurdles in business expansion, as many transactions and collaborations prefer dealing with registered entities due to the assurance of legal compliance.
Advantages of a Partnership Firm:
A partnership firm has a wide range of advantages over a private company or a proprietorship firm.
- It is easier to kick start a partnership as it has minimal requirements. A partnership deed registration would suffice in most cases. For instance, on the other hand, an LLP would require DIN (Director Identification Number), digital signatures etc
- The decision-making process gets complex in private companies, involving the board of directors and passing resolutions all around. This is not required in a partnership firm.
- Raising funds is comparatively uncomplicated in the case of partnership firms as compared to proprietorship firms. Having multiple partners makes it more work to collate the funds for the business.
- Partnership firms are favoured in banks to offer credit facilities as partnership firms are capable of raising more capital and they appear more stable compared to proprietorship firms.
- The partners in the firm have a common goal and they work with the same intent. Sense of shared ownership ensures greater credibility and higher are the chances of running a successful business.
Registration of Partnership Firm:
A partnership firm can be registered easily with the Registrar of Firms by enclosing the following details.
- The name of the firm
- The place where the principal business will be carried out.
- Names of places where the firm would be opening the branches of business.
- The name and address of the partners.
- The date on which the business will be started.
- Joining dates of various partners of the firm.
- Time duration during which the partnership has been sustained.
- Partnership deed with the signatures of the partners affixed appropriately.
The application must be submitted along with the above-stated information and the prescribed fee.
Consequences of Not Registering a Partnership Firm:
Although the Partnership Act, of 1932, does not make the registration of partnership firm mandatory: https://www.mca.gov.in/MinistryV2/incorporation.html, the fact that it suggests the registration of a partnership firm, should make one ponder about the ifs and buts of failing to do so. The Act subtly puts persuasive pressure to register the partnership firms. Section 69 of the Act, lists out a few disadvantages of not registering the firm. This section is quite elaborative and explanative and delineates the downsides of not having the firm registered. Perhaps the intention of the statute was to make it passively compulsive to register partnership firms.
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Cannot File a Suit Against a Co-Partner or a Third Party:
A business is bound to face challenges at some point in time. Either there might be disagreements or conflicts arising between the partners or there might be issues such as a breach of the contract created by third parties. Unfortunately, a partnership firm that has skipped registration cannot avail of any legal support in this case. In such scenarios, the firm loses its right to sue a third party or a co-partner. Neither the partners nor any person can act on behalf of the firm at such an instance. In the case of Jagat Mittar Saigal vs Kailash Chander Saigal, it was held that, in order to sue, the firm or the partner in question must have their name registered with the Registrar of Firms. However, the partners can resolve the dispute through arbitral proceedings, as held in Umesh Goel v. Himachal Pradesh Co-operative Housing Society Ltd in 2016.
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Cannot Avail Set-Off Claim Against Third Parties:
The principle of set-off claims is explained in section 69(3) of the Partnership Act, of 1932. In a set-off claim, the debtor makes adjustments and can put forward reciprocal claims in the mutual debts with the creditor. However, when a partnership firm is not registered this principle cannot be put into practice.
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Third Parties Cannot be Estopped from Suing the Unregistered Partnership Firm:
Although an unregistered partnership firm cannot sue a third party, the converse cannot be prevented by the Act. Thus, A third party can still go ahead and file a case against the unregistered partnership firm. Merely, because the firm does not have the right to sue does not render it immune to legal suits filed by other parties.
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Partners Cannot Take Action Against Another Partner:
In an unregistered partnership firm, a partner cannot take any legal action against a co-partner. Any breach of contract or conflicts of interest cannot be addressed by the law in the case of unregistered partnership firms. In an unregistered partnership firm, the partners cannot enforce their rights.
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Conversion To Another Entity Becomes Impossible:
A registered partnership firm has the option of getting itself converted to any other corporate entity like that of an LLP. This privilege is not available to unregistered partnership firms.
The fact that a partnership firm is easy to incorporate and does not require to be registered is the major reason why a number of businesses opt for it. But when the partners choose to sit over it without registering, they will have to pay the price for it quite dearly. Although an unregistered partnership firm is still legal in the eyes of law and it can still carry on its course of business uninterrupted, the disadvantages it carries alongside it are quite a bit on the heavier side. A business cannot run for long in an ideal situation and is prone to face conflicts and the firm and its partners will have to respond to it with legal actions which would be inaccessible without the registration of the firm. Therefore, the partners must make a vigilant choice and have their partnership firm registered proactively.
In conclusion, although Indian law does not mandate the registration of partnership firms, partners should carefully consider the consequences of non registration of partnership firm . Factors such as legal recognition, access to remedies and financial implications should be weighed against the convenience of avoiding registration.
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