Everything you need to know about the formation of a Partnership Firm

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A partnership can be formed by two or more persons. Law prescribes no mode of forming a partnership. Even the registration of partnership is not compulsory.

Partnership is formed through a contractual relation between two or more persons. This relationship is based upon mutual trust and good faith. The agreement between the partners is to carry on a lawful business and to share the profits there from.

In order to avoid disputes, the agreement should be in writing, though the law does not require the agreement to be in writing. In the absence of such an agreement the rights and duties of partners are determined of the Partnership Act 1932.

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Partnership Deed: It is a document containing the terms and conditions of a partnership. It is an agreement in writing signed by all the partners duly stamped and registered.

It defines the rights, duties and obligations of partners and governs relations among them in the conduct of business affairs of the firm. It is not a public document.

The partnership deed must not contain any term which is contrary to the provisions of the Partnership Act. A written agreement is helpful in preventing and resolving disputes among the partners.

The terms and conditions stated in partnership deed can be changed with the consent of all the partners.

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A partnership deed usually contains the following clauses:

1. Name of the firm.

2. Nature of the firm’s business.

3. The principal place of business.

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4. Duration of partnership, if any.

5. Names and addresses of partners.

6. Amount of capital to be contributed by each partner.

7. Amount which can be withdrawn by each partner.

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8. The profit-sharing ratio.

9. Rate of interest, if any, on capital and drawings.

10. Amount of salary or commission payable to partners.

11. Allocation of work among partners.

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12. Mode of valuation of goodwill.

13. Procedure for admission, retirement, etc, of a partner.

14. Procedure for maintaining accounts and getting them audited.

15. Procedure to be followed in the event of dissolution of the firm and settlement of acĀ­counts.

16. Arbitration clause in case of disputes among partners.

17. Loans and advances by partners and rate of interest payable on them.

Registration of Partnership

Registration of a partnership firm is not compulsory under law. The Partnership Act 1932 provides that if the partners so desire they may register the firm with the Registrar of Firms of the State in which the main office of the firm is situated. A firm may be registered at the time of its formation or at any time thereafter.

Procedure for Registration

In order to get a partnership firm registered an application in the prescribed form must be filed with the Registrar of Firms. The application should contain the following information:

i. The name of the firm

ii. The principal place of business of the firm.

iii. Names of other places where the firm’s business is carried on.

iv. Names in full and permanent addresses of the partners.

v. The date on which each partner joined the firm.

vi. Duration of partnership, if any.

The application should be signed and verified by each partner. Then it is submitted to the Registrar of Firms of the area in which the principal place of the firm’s business is situated or proposed to be situated. A small amount of registration fee is also deposited along with the application.

The application submitted to the Registrar is examined. If the Registrar is satisfied that everything is in order and all legal formalities have been observed, the Registrar shall make an entry in the register of firms.

He will also issue a certificate of registration. Any change in the information submitted at the time of registration should be communicated to the Registrar. RegĀ­istration does not provide a legal entity to the partnership firm.

State the Consequences of Non-Registration

An unregistered partnership firm suffers from the following limitations:

1. It cannot enforce its claims against a third party in a court of law.

2. It cannot claim adjustment for any sum exceeding Rs. 100. Suppose an unregistered firm owes Rs. 1200 to A and A owes Rs. 1000 to the firm. The firm cannot enforce adjustment of Rs. 1000 in a court of law.

3. It cannot file a legal suit against any of its partners.

4. Partners of an unregistered firm cannot file any suit to enforce a right against the firm.

5. A partner of an unregistered firm cannot file a suit against other partners.

Non registration of a firm, however, does not affect the following rights:

(i) The right of a partner to sue for the dissolution of the firm or for the accounts of a dissolved firm or to enforce any right or power to realise the property of a dissolved firm.

(ii) The power of an official Assignee or Receiver to realise the property of an insolvent partner

(iii) The rights of the firm, or its partners, having no place of business in India.

(iv) Any suit or set off in which the claim does not exceed rupees one hundred.

(v) The right of a third party to sue the unregistered firm or its partners.

(vi) The right to sue a third party for infringement of a patent right.

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