Introduction
Business partnerships have always been a preferred way for entrepreneurs to combine resources, skills, and capital for a common purpose. A partnership firm allows individuals to come together and operate a business while sharing responsibilities and profits. In India, partnerships are governed by the Indian Partnership Act, 1932, which lays down the rules for their formation, operation, and dissolution. This article explains the process of registering a partnership firm, drafting an agreement, and the legal implications of dissolution.
What is a Partnership Firm?
A partnership firm is an arrangement between two or more persons who agree to carry on a business together and share its profits or losses. Unlike a company, a partnership firm does not have a separate legal identity from its partners. Each partner contributes either money, property, or skills and, in return, receives a share of the profits. The relationship between partners is built on mutual trust, cooperation, and a legally binding agreement.
What is a Partnership Deed?
A Partnership Deed is a written legal document that defines the rights, duties, and obligations of partners in a firm. While the Indian Partnership Act, 1932, does not make it compulsory to create a deed, having one avoids disputes and brings clarity to business operations.
The deed usually contains essential details such as the firm’s name, nature of business, place of business, capital contributions of partners, profit-sharing ratios, and procedures for admission, retirement, or removal of partners. It also specifies rules regarding salary, interest on capital, dispute resolution, and dissolution of the firm.
Partnership Firm Registration Process in India
1. Application for Registration
The registration of Partnership firm may be effected at any time by sending by post or delivering it to the registrar of the area in which any place of the business of the firm is situated or proposed to be situated. The application must include a statement in the prescribed form and be accompanied by the prescribed fee.
The statement should contain the following details:
1. The firm’s name
2. The place or principal place of business of the firm
3. The names of any other places where the firm carries on business
4. The date when each partner joined the firm
5. The full names and permanent addresses of the partners
6. The duration of the firm
2. Signing and Verification
All the partners, or their agents specially authorised on this behalf, shall sign the statement.
Each person signing the statement shall also verify it in the manner prescribed.
3. Restrictions on Firm Name
A firm name shall not contain any of the following words, namely, queen, king, emperor, royal, or patronage of government, except when the state government signifies its consent to use such words as part of the firm name in writing.
4. Registrar’s Role
When the registrar is satisfied that the provisions of section 58 are duly complied with, he shall record an entry of the statement in a register called the register of firms and shall file the statement.
5. Use of “Registered”
The firm, when registered, shall use the bracket and word (Registered) immediately after its name.
6. Late Registration on Payment of a Penalty
If the statement in respect of any firm is not sent or delivered to the registrar within the time, then the firm may be registered on payment to the registrar of a penalty of 100 rupees per year of delay or a part thereof.
Consequences Of Non-Registration
Business entities are required to register, and non-registration can lead to penalties or the inability to enforce contracts. However, the Indian Partnership Act does not make the registration of firms compulsory, nor does it impose any penalty.
However, non-registration of partnerships gives rise to some disabilities. Although registration is not compulsory yet the consequences or disabilities of non-registration have persuasive pressure on their registration. The disabilities are as follows:-
- Restriction on Suits by the Firm or Partners Against Third Parties-
The firm or any other person on its behalf cannot take action against the third party for breach of contract entered by the firm unless the firm is registered and the persons suing are or have been shown in the registrar of firms as partners in the firm. In other words, a registered firm can only file a suit against a third party, and the person suing has been in the Registrar of firms as a partner in the firm. - No Right of Set-Off or Other Claims by Partners-
If an action is brought against the firm by a third party, then neither the firm nor the partner can claim any set-off if the suit is valued for more than one hundred rupees or pursue other proceedings to enforce the rights arising from any contract. - Bar on Legal Action Between Partners of an Unregistered Firm
A partner of an unregistered firm is precluded from taking any legal action against the firm or any person to has been a partner in the firm. But such a person may sue for dissolution of the firm and realisation of his share in the firm’s property, where the firm is dissolved. - Third Parties Retain the Right to Sue an Unregistered Firm-
Third-party can sue the firm case of an unregistered firm, an action can be brought against the firm or by a third party.
Exceptions Of Partnership Firm
- The right of third parties to sue the firm or any other partner.
- The right of partners to sue for dissolution of the firm or settlement of the accounts of a dissolved firm, or the realisation of the property of a dissolved firm.
- The power of an official assignee, the receiver of the court, to release the property of the insolvent partner and to take action.
- The right to sue or claim a set-off if the value of the suit does not exceed rupees one hundred in value.
- The right to sue and proceedings instituted by the legal representatives or heirs of the deceased partner of a firm for accounts of the firm or to realise the property of the firm.
Dissolution of Partnership Firm
According to the Indian Partnership Act of 1932, the dissolution of a partnership between all partners of a firm is called dissolution. It means breaking up the relationship between partners of the firm under various circumstances contemplated by the act.
Modes Of Dissolution of a Partnership Firm
Voluntary Dissolution
It consists of four types:-
(i) Dissolution by Agreement:-
A firm may be dissolved with the consent of all the partners or under a contract between partners.
(ii) Compulsory Dissolution:- A firm is compulsorily dissolved:-
- By the adjudication of all the partners or of all the partners but one as insolvent
- By the happening of any event which makes it unlawful for the business of the firm to be carried on or for all the partners to carry it on in partnership.
However, when more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventure and undertakings.
(iii) Dissolution on the happening of Certain Contingencies:-
Subject to a contract between the partners, a firm may be dissolved on the following contingencies:-
- By the adjudication of a partner as an insolvent.
- By the death of a partner.
- Where the firm is constituted to carry out one or more adventures or undertakings, then by completion thereof.
- Where the firm is constituted for a fixed term, on the expiry of that term.
(iv) Dissolution by Notice of Partnership at will:-
- Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.
- In case the date is mentioned in the office, the firm is dissolved from the date mentioned in the notice as the date of discussion, or in case no date is mentioned, as from the date of the communication of the notice.
Dissolution by the Court
The court may, at the suit of the partner, dissolve the firm on any of the following grounds:-
(i) Insanity/unsound Mind:-
Where the partner has become of unsound mind, the court may dissolve the firm on a suit of the other partners. Temporary sickness is no grounds for the dissolution of the firm.
(ii) Permanent Incapacity:-
When a partner other than the partner suing has become in any way permanently incapable of performing his duties as a partner, then the court may dissolve the firm. Such permanent incapacity may result from physical disability or illness, etc.
(iii) Misconduct:-
Where a partner is guilty of conduct that is likely to affect prejudicially the carrying on of business, the court may order for dissolution of the firm. The misconduct doesn’t need to include the conduct of the business. The important thing is the adverse effect of the misconduct on the business. In each case, the nature of the business will decide whether an act is misconduct or not.
(iv) Persistent Breach of Agreement:-
Where a partner wilfully commits a breach of agreements relating to the management of affairs of the firm, then the court may dissolve the firm. The following comes into a breach of contract:-
- Holding more cash than allowed
- Refusal to show accounts despite repeated requests, etc.
- Keeping erroneous accounts
(v) Transfer of Interest:
Where a partner other than the partner suing has transferred the whole of his interest in the firm or to a third party or has allowed his share to be charged or sold by the court, in the arrears of land revenue due by the partner, the court may dissolve the firm.
(vi) Continuous/Perpetual Losses:-
Where the business of the firm cannot be carried on except at a loss in the future, the court may dissolve the firm.
(vii) Just and Equitable Grounds:-
Where the court considers any other grounds or equitable to the dissolution of the firm, it may dissolve a firm. The following are the cases on just and equitable grounds:-
- Deadlock in the management
- Loss of substratum
- Gambling by a partner on a stock exchange
- Where the partners are not on talking terms between them
Consequences of Dissolution
Liability for Acts of Partners
In the dissolution of the firm, the partners continued to be liable as such to third parties for any act done by any of them. This would have been an act of the firm if done before the dissolution, until public notice was given of the dissolution.
Provided that the estate of a partner who dies, or is insolvent, or who is not known to the person dealing with the firm to be a partner, retires from the firm, is not liable for acts done after the date on which he ceases to be a partner.
Right of Partners to have the Business Wound up
On dissolution of the firm, every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts of the firm. And to have the surplus distributed among the partners or their representatives according to their rights.
Continuing Authority of Partners for Purposes of Winding up
After the dissolution of the firm, the authority of each partner to bind the firm. The other mutual rights and obligations of the partners are necessary to wind up the affairs of the firm.
Therefore, the firm is in no case bound by the acts of the partner who has been adjudicated insolvent. But this provision does not affect the liability of any person who has knowingly permitted himself to be the partner of the insolvent.
Mode of Settlement of Partnership Accounts
In settling the accounts of the firm after dissolution, the following rules shall be subject to agreement by the partners:-
- Losses, including deficiencies of capital, shall be paid first out of profits and next out of capital, by the partners individually in proportions in which they were entitled to share profits.
- The assets of the firm, including any sum contributed by the partners to make up for deficiencies of capital, must be applied in the following manner:-
- In paying the debts of the firm to third parties.
- In paying each partner what is due to him from the capital.
- In paying each partner what is due to him on account of capital.
- The residue, if any, shall be divided among the partners in the proportions in which they share the profits.
Payment of Firm Debts and Separate Debts
Where there are joint debts due from the firm and also separate debts due from any partner:-
- The property of the firm shall be applied in the first instance in payment of the debts of the firm. If there is any surplus, then the share of each partner shall be applied to the payment of his separate debts or paid to him.
- The separate property of any other partner shall be applied first in the payment of his separate debts. And a surplus in the payment of the debts of the firm.
Conclusion
A partnership firm offers flexibility and shared responsibility, but registration and a proper partnership deed are essential to avoid legal hurdles. While an unregistered firm can operate, it faces major restrictions in enforcing rights. For smooth setup or dissolution, professional guidance matters.
JustStart helps you register, manage, and dissolve your partnership firm with complete compliance and ease. Get in touch today to start your journey the right way!
Frequently Asked Questions (FAQs)
1. Is it mandatory to register a partnership firm in India?
No, registration of a partnership firm is not mandatory under the Indian Partnership Act, 1932. However, an unregistered firm faces several legal restrictions, such as the inability to file suits against third parties or partners.
2. What is a partnership deed?
A partnership deed is a written agreement between partners that defines rights, duties, profit-sharing ratios, and other terms. It acts as the foundation of the firm and helps prevent disputes.
3. Can a partnership firm be dissolved?
Yes, a partnership firm can be dissolved either voluntarily by the partners or through a court order. The process includes settling liabilities, distributing assets, and closing accounts.
4. What are the disadvantages of not registering a partnership firm?
An unregistered partnership firm cannot sue third parties, claim set-offs in legal cases, or allow partners to enforce rights against each other. It limits legal protection and creates operational challenges.
5. How can JustStart help in partnership firm registration?
JustStart provides end-to-end assistance with drafting the partnership deed, registration, compliance, and legal guidance, ensuring a smooth and hassle-free process for entrepreneurs.
