ESTABLISHING A PARTNERSHIP FIRM

The Indian Partnership Act, 1932 came into force with effect from 1st October 1932, other than Section 69, which came into effect on 1st October 1933. Section 4 of this Act defines the term Partnership. According to this Section “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all[1].” If we critically analyse the Section, we can infer that in order to become a partner, the following essential factors must co-exist.

That there is an association of two or more persons.
The relationship arises from an agreement between the partners.
The main object must be to share profits and losses of the business.
The business may be carried on by all or any of them acting for all.

It is to be noted in this context that Partnership arises by a contract between parties competent to contract with free consent and where the object and subject matter of the business is not against the law. But, in a partnership firm a minor can be admitted to the benefits of the business only with the consent of all other partners.

BENEFITS OF A PARTNERSHIP FIRM

Easy Formation - A partnership business can be easily formed without much complicated legal formalities. It is easy to organize.
Profit Incentive - The profits of a business are shared among the partners as per the agreement. Hence, partners of the firm are motivated to earn more as higher the profit, higher is the shares.
Improvement in the spirit of Co-operation - The business depends upon mutual trust and confidence. It is the reason behind the success. This increases the spirit of co-operation.
Protection of minors - In a partnership business a minor is only admitted to the benefits of the business, only with the consent of all the partners. As long as he remains a minor, he gets all the benefits of partnership, and has the right to his share of firm’s property and profits. And at the same time, a minor does not become personally liable for any act of the Firm.
Ease of Dissolution - A partnership can be easily dissolved either by mutual consent of the partners or according to the terms agreed upon in the agreement.
Voluntary Registration - Registration of a partnership firm is not mandatory. Although it is desirable to register the firm so that it can avail the advantages of a registered firm.

CLASSIFICATION OF PARTNERSHIP

Partnership may be either for a particular period, or it may be a partnership at will.

Particular Partnership - In this type of partnership two or more person agrees to do business in a particular adventure or undertaking or for a particular period of time[2].
Partnership at will – In this type of partnership, no fixed duration of partnership or the provision as to the determination of partnership is made[3]. As no fixed and determined date for termination of the business is mentioned, neither retirement or death of a partner has any impact on the continuation of the business.

Which Business / Profession is ideal for Partnership Firm?

Partnership is basically carried on by people coming from different walks of life having managerial ability, supervisory talent and leadership skill. All these help the business to grow financially and reduce the risk of loss. “Such firms are generally most suitable for comparatively small business such as retail and wholesale trade, professional services, medium sized mercantile houses and small manufacturing units[4].” Speaking generally, a partnership form of business structure would suit best the organizations working in the following types of industries:

Architectural Profession;
Legal Profession;
CA / CS;
Medical Professionals;
Event Management;
Consultation business;
Human Resource and outsourcing business;
Real Estate Industry;
Fashion Industry, including designing, manufacturing or trading business;
Small Food Industry;
New Entrants in the Entertainment Sector
Contracting and Supplying industry;
Traders and Suppliers; etc.

IS REGISTRATION OF A FIRM MANDATORY?

Indian Partnership Act, 1932 does not provide for compulsory registration of firms. The Act makes registration optional. The Partnership Act places no prohibition upon an unregistered partnership firm from making contract either between the partners inter se or with some third parties. Even, the Act places no prohibition upon an unregistered firm from acquiring property or assets. An unregistered Partnership Firm can carry on its business like any registered firm.

However, the necessity of registration is felt when any dispute arises either between the partners of the firm or between the firm and any third party. Non- registration of partnership firm gives rise to number of disabilities mentioned in Section 69 of the Indian Partnership Act.

According to Sections 4 and 5 of the Act, Partnership is created by virtue of an agreement and not out of status. Registration does not create partnership. Registration is merely a reliable evidence of the existence of a partnership[5].

Non- registration of partnership leads to certain number of disadvantages or disabilities. Section 69 of the Act states these disadvantages. The prohibitions laid down in Section 69 are absolute in nature and they cannot be dispensed with even by the court on the ground of consent of the parties. According to Section 69[6], the implications of non-registration are: -

1. Suits between Partners and the firm

A partner of an unregistered firm cannot file a suit – either,

Against the firm
Against any individual partner thereof,

for the purpose of enforcing a right arising from the contract or a right conferred upon him by The Indian Partnership Act, 1932.

2. Suits between firm and the third party

No suit can be filed on behalf of an unregistered firm against any third party for the purpose of enforcing a right arising from any contract between the firm and the third party.

3. An unregistered firm cannot claim a set-off in a suit

According to Section 69(3), the provisions of sub-section (1) and (2) above shall also apply to claim of set-off or other legal proceeding to enforce a right arising from a contract.

In effect, a Partnership Firm, if not registered, can enter into any contract or agreement with any person, and may carry on any business or profession as is permissible, just like any registered partnership firm. However, when any dispute arises, either among the partners themselves or between the Firm and any third party, while a duly registered Firm can take the matter to Court if needed, the same is not permissible for an unregistered firm.

An unregistered firm cannot sue any third person, nor can the partners of such firm sue any other partner. Hence, for Registration of Firms are mostly recommended.

PROCEDURE FOR ESTABLISHING A PARTNERSHIP FIRM

A Partnership Firm can be established with minimal efforts and expenses, as compared to the incorporation of Companies or LLPs. While the Firm gets established on a Partnership Agreement alone, the commencement of business / profession under the Firm may require a few more steps, including proper registrations / licensing under the relevant Tax Laws and other local laws. The Step-wise procedure for establishing a registered partnership firm ready for business has been stated hereinbelow.

PARTNERSHIP DEED

The partnership deed refers to the written agreement between partners regarding their mutual rights and obligations. A Partnership Agreement may be either oral or in writing. But it is always preferred to have it in writing to avoid disputes in future. The Partnership deed is also referred to as Partnership Agreement, Constitution of Partnership and so on. It is necessary for the deed to be properly drafted and stamped according to the Indian Stamp Act. Each partner must have a copy of the deed.

Contents Of A Partnership Deed

A Partnership Deed shall contain all the rights and obligations of the partners, along with the procedure of working of the firm, object of the firm, and the manner of profit sharing and firm management procedures. Each Deed is drafted, keeping in mind the interests and requirements of each business, and the contents varies from case to case. A sample partnership deed may contain, among others, the following general terms and clauses -

The Firm Name
Names and Details of the Partners
The Principal Place of Business of the Firm, along with the Branches (if any)
The nature and object of the business to be carried on by the Firm
Commencement and Duration of partnership
The Capital of the Firm
Share of each partners, and details of the partners’ drawings and other remunerations
Provisions relating to interest on capital, loans, drawings
Rights, powers and duties of partners
Provisions relating to induction and expulsion of Partners
Dissolution of the Firm
Dispute Resolution or Arbitration, and the likes.

Firm Name - According to Section 58(3)a firm name cannot contain the following words like, Crown, Emperor, Empress, Empire, Imperial, King, Queen, Royal or any of the names or emblems specified in the Schedule to the Emblems and Names (Prevention of Improper Use) Act, 1950, or any colourable imitation thereof, unless permitted so to do under that Act, or any name which is likely to be associated by the public with the name of any other firm on account of similarity, or any name which, in the opinion of the Registrar, for reasons to be recorded in writing, is undesirable[7].

Relation of Partners - Partners in a partnership firm is both an agent and principal for himself and others. It is the significance of the phrase mentioned in Section 4 “carried on by all or any of them acting for all.” Mutual agency is the base of a partnership business. Whether a person is a partner can be inferred from the fact that a relationship of an agent and a principal exists and not from the sharing of profits and losses of the business. If he can act on behalf of all the partners and if other partners can act on behalf of him, mutual test of agency can be concluded.

Non-Compete: It is to be noted that “after a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on a similar business in the firm-name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up : Provided that where any partner or his representative has brought the goodwill of the firm, nothing in this section shall affect his right to use the firm-name”[8]. “Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits and notwithstanding anything contained in section 27, of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable”[9].

NOTARIZATION OF A PARTNERSHIP DEED

Notarization of a partnership Deed is recommended as notarization proves that the partnership deed has been examined. A Notary would verify, authenticate, certify or attest the Partnership Deed. Notarization basically saves one from any fraudulent activity. It helps to prevent forgery. Rights of the citizens are protected by the Notary Certificate issued by the Notary Public. Notarization assures the parties to the contract that the Deed is genuine and true to its terms.

REGISTRATION OF PARTNERSHIP FIRM

Although Registration of a firm is not mandatory but it is advisable to register the firm to avail the benefits. Registration of a firm with the Registrar of the area under the Indian Partnership Act 1932 is different from registration of a firm under the Income Tax Act. Registration with the Income Tax Department is mandatory. According to Section 58 of the Indian Partnership Act,1932 a registration can come into effect at any time just by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee and a true copy of the deed of partnership stating :

the firm-name,
the nature of business of the firm;
the place or principal place of business of the firm,
the names of any other places where the firm carries on business,
the date when each partner joined the firm,
the names in full and permanent addresses of the partners, and
the duration of the firm.

The statement shall be signed by all the partners, or by their agents specially authorized in this behalf[10].

Each person signing the statement shall also verify it in the manner prescribed.

When the Registrar is satisfied that the provisions of section 58 have been duly complied with, he shall record an entry of the statement in a register called the Register of Firms, and shall file the statement[11].

Online Registration Of Firm[12]

The process for registering Partnership Firms with the Registrar of Firms, have now become an online process. Though the physical process is still acceptable, the online method is surely of greater convenience. Below is a step-wise procedure laid down for registration of Partnership Firms online in West Bengal.

Login to the official website.
After one has logged in, the new application form is to be filled, which includes details like mobile number, email id, date of commencement of the business etc.
If the partnership firm has any other branches details of those branches are also to be included.
Once all columns are filled, required documents supporting the statements must be uploaded.
After uploading the required documents, the application is submitted. An application number is generated.
Subsequently, payment can be made either through debit card, credit card.
Once, the payment is made the concerned department will process the application and a letter of approval is issued.

PAN CARD FOR A PARTNERSHIP FIRM

Documents Required To Apply For PAN of a Partnership Firm

The following lists of documents are required for the application of PAN card for a partnership firm: -

A Registered Partnership Deed, or, in case of unregistered firm, a Partnership Deed which is duly notarized by a Notary in India;
Proof of Address of the Place of Business;
Proof of Identity of each Partner.

How To Apply For A Pan Card For A Partnership Firm

An Application for PAN has to be made in Form 49A (for Firms located in India) or Form 49 AA (for Firms located abroad).
Online application forms can be availed at the NSDL or UTIITSL website.
The Form must be duly filled by giving all the relevant information relating to the Firm. For Partnership Firms, providing Office Addresses, Date of Formation, Telephone number and E-mail for communication, Registration Number (if Firm is registered), and Source of Income are mandatory.
In the space for Source of Income, the type of Firm Business need to be selected from a list.
The Application must be signed by the Partner / Managing Partner of the Firm, and his name, capacity and place of application need to be mentioned.
Once the filling of the form is completed, payment has to be made. It can be made either thorough debit card, credit card or net banking. Charges for PAN application is generally Rs. 93 (excluding GST), for an Indian Firm.
After making the payment, the Application form, along with the necessary documents shall be sent to the PAN Office.
Generally a PAN Card application is processed within 15 to 20 days.

OBTAINING TRADE LICENSE

A Trade License is a permit or licence issued by the local municipality, as a permission to carry out a particular trade or business or profession with the locality. While forming a Partnership Firm, it is important to get a Trade Licence on the Firm’s Name, so that business under the partnership can be carried on smoothly.

The process of obtaining a trade licence is quite simple, though it varies from State to State. We have dealt with a detailed procedure for obtaining a Trade Licence in a separate article. Below is a list of general documents which may be required to obtain a Trade License. (Reference has been made to the Documents for Licence under Kolkata Municipal Corporation)

Important Documents for Trade License of Partnership Firm

1. “An application in prescribed form is to be submitted U/S 199 as per Kolkata Municipal Corporation Act,1980.

2. Places of business.

(a) If owned by petitioner, tax bill to be produced;

(b) If a tenant, rent bill to be produced;

(d) If relative/person granted rent free accommodation by the premises owner, consent letter from the owner to be produced;

(e) If a person is granted rent free accommodation by any bonafide tenant, consent letter along with the current Certificate of Enlistment (CE) of the tenant to be produces;

(f) If a sub-tenant, consent of the premises owner will also to be produced along with documents viz. rent bill, current CE etc. of original tenant.

(g)Besides License Department Officials may also issue CE on spot if any trade/profession/calling is carried out without obtaining trade license.

3. In case of Partnership Firm, the Partnership deed needs to be produced.

Proforma of Declaration in stamp paper/ affidavit is to be submitted. This document certifies that if there is any variation and inconsistency or illegality by the firm, the certificate of enlistment can be cancelled."[13]

GST REGISTRATION FOR A PARTNERSHIP FIRM

Documents Required

For GST Registration of a Partnership Firm, the following documents may be required:

The Partnership Deed
The Identity Proof of The Partners
Authorization Letter for appointing one Partner as the Authorized Signatory
PAN Card of the Firm
Proof of Address of the Principal place of business of the Firm

How To Apply For GST Number

For online registration under the GST Act, one needs to visit the Website for GST.
On the page for New Registration Application, the “New Registration” option is to be selected.
On selecting the same, the GST Application Form will appear. The Form will have two parts - Part A and Part B
First, the Part A needs to be filled up. All the relevant details like State where the Firm is located, PAN of Firm, Name and details of Authorised Signatory,
After filling the Form part A, an OTP will be sent to the given Mobile number for verification.
Required documents has be uploaded after this.
Following this one receives an Application Verification Number. Part B of the form has to be filled using this reference number.
Subsequently, the GST officer would verify all the documents and statements.
Then, within next 7 business days, GST Number is allotted.

CONCLUSION

Thus, we can conclude that a partnership firm is easy to establish and does not require complex legal procedures. Registration is not compulsory, and a Firm can function fully without the registration. The other associated licensing and registration like the PAN, GST, Trade Licence, etc., are required for all kind of business structures, be it a partnership, LLP or PLC. In a partnership firm, the partners of the firm are both agent and principal of the firm. Mutual Agency is the essence of partnership. In a partnership business the liability of all the partners are unlimited and can include even their personal properties.

References [1] The Indian Partnership Act,1932, ⸹4, No.9, Acts of Parliament,1932(India) [2] The Indian Partnership Act,1932, ⸹8, No.9, Acts of Parliament,1932(India) [3] The Indian Partnership Act,1932, ⸹8, No.9, Acts of Parliament,1932(India) 4] Achi Biz, https://achibiz.com/ufaqs/suitability-of-partnership-firm/, [5] The Indian Partnership Act,1932, ⸹68, No.9, Acts of Parliament,1932(India) [6] The Indian Partnership Act,1932, ⸹69, No.9, Acts of Parliament,1932(India) [7] The Indian Partnership Act,1932, ⸹58(3), No.9, Acts of Parliament,1932(India) [8] The Indian Partnership Act,1932, ⸹53, No.9, Acts of Parliament,1932(India) [9] The Indian Partnership Act,1932, ⸹54, No.9, Acts of Parliament,1932(India) [10] The Indian Partnership Act,1932, ⸹58(1), No.9, Acts of Parliament,1932(India) [11] The Indian Partnership Act,1932, ⸹58(2), No.9, Acts of Parliament,1932(India) [12] https://partnershipfirmregistration.silpasathi.in/downloads/Partnership.pdf [13]KolkataMunicipalCorporation,https://www.kmcgov.in/KMCPortal/jsp/KMCTradeLicenseHome.jsp#mainContent (last visited Aug. 15, 2020

This article has been authored by Ms. Abheri Roy, a student of the Department of Law, University of Calcutta.

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ESTABLISHING A PARTNERSHIP FIRM – PROCEDURE