In India, we find different legislations and rules that deal with the incorporation of various body corporate including firms in nature of Partnership firms, LLPs, Companies, etc. Looking into the firms alone, which is in nature of Partnership firms, are governed by respective legislation, and the procedures for such incorporation have also been provided thereupon. What would you do when a client comes to you asking what he should opt for when it comes to the registration of his firm? Should we look into different benefits that he will get if suggested to follow one over the other? Or should we just register accordingly as per his wish? This article will be looking into the registration of Partnership firms under their respective enactment and also the pros and cons that a person or the registered firm would entitle by the fact of its registration.
Indian law on Partnership firms:
It is important to note that provisions relating to both the Partnership act along the sale of goods act were part and parcel of the Indian Contract Act of 1872. Both became two different enactments after the respective amendments to the Contracts act of 1872. If we talk about firms, the only law that regulates such incorporation of the firm is the Partnership act. Companies and Limited liability Partnerships are governed by respective laws.
Indian Partnership act of 1932 came into force on 1st October 1932 except for section 69, which later came into force on 1st October 1933. The preamble of the act states that it is an act to define partnerships and to amend the laws relating to the partnership from time to time. It consists of 7 chapters with two schedules. The body of the act contains various provisions starting from the nature of a partnership firm, relationships between partners and the firm, to the pros and cons that a registered firm would get than a firm that is not registered. This part will be looked at later, after looking into the provisions relating to the registration of a firm under the act.
Definitions:
The definitions of a partnership, partner, and firm have been provided under section 4 of the act. It states as follows.
- “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.
- Persons who have entered into a partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name.”
Determination of the existence of partnership has been provided under section 6, which requires not only the element of sharing of profits but also a real relationship between the firm and its partners. If this is failed, then the act shall not come into the picture, and other laws would be sought.
Registration of Partnership firm:
Sections 56 to 71 under Chapter VII of the act provide specifically for the registration of firms.
Firstly, section 58 provides the manner for the application of the registration. Section 58 subsection (1) states that in order to get the registration of the firm, it is important to send a statement of registration in the prescribed form with the prescribed fee to the registrar of such an area. Here, the statement shall be sent either by post or through direct delivery to the registrar of the particular area at which the partnership firm will have its business or proposed to be the place of business or situated.
Whenever the application is made, it should mandatorily contain particulars such as
- Name of the firm,
- place/principal place of business of the firm,
- all other places where the said firm operates its business,
- date of joining of each partner to the firm,
- addresses with full names of each partner,
- the time period of the firm or its duration
secondly, the statement should be signed by all the partners or any agent who has been authorized to do such an act. Sub-section (2) imposes a duty on each person who signs the statement to verify whether the statement is in the right manner as prescribed or not.
Subsection 3 prohibits a firm from naming with the words such as a crown, emperor, empress, empire, king, queen, royal, etc., and also words expressing the patronage, or approval of the government except with the authorized consent from the side of the state or the government in through order in writing.
Pros and Cons of Registration/Non-registration of the firm under the act:
- Jointly and severally liable: One of the most known disadvantages of a partnership firm to that of an LLP is that the liability of the firm shall extend even to each of the partner’s personal belongings under section 25. This means that the partners are also personally liable apart from the ratio they hold in the firm. They are jointly and severally liable.
- Act of partner binding on the firm: as per section 18, a partner of a firm is considered to be the agent of the firm, and as part of this rule, all the acts done by the partner shall be prima facie binding on the firm, and not amount to personal liability.
- Effect of non-registration under section 69:
- Firstly, there shall be no right to sue for the enforcement of a right conferred by the act or any contract in the name of the firm or by any partner as a partner of such firm against any other person or any firm unless such firm is registered under the act and the partners of such firm should be in a position to show that they are authorized partners of the firm.
- There shall be no right to sue or be sued for non-performance of terms of the contract entered by the firm in any court of law of such firm has not been registered, and the partners are not shown to be partners with the registrar of the firm.
- Even if the firm is not registered, the two main aspects shall continue to be in effect. They are, 1) the right to sue for the dissolution of the firm or in the case of a dissolved firm, the right to sue for the realization of such properties of the insolvent firm, 2) the powers of the official liquidator or assignee shall not be affected to realize his right over the insolvent partner.
- Similarly, this section shall not be applicable in the territories which have been notified to be not applicable.
- One of the benefits is that all these rights shall be applicable once the firm is registered and vice versa.
