When two or more individuals plan to start a business, the easiest legal setup, in terms of formation and running compliances, is the partnership firm. Hence, we see a huge proliferation of partnership firms in India.
A partnership firm may opt to register itself with the registrar. While specific statistics on the exact percentage of registered partnership firms are not readily available from the search results, it is understood that a significant portion of partnership firms remains unregistered. This is primarily because registration is voluntary under the Indian Partnership Act of 1932, allowing firms to choose whether or not to register at their formation or later during their operation. However, it is advisable to register due to the legal protections and benefits it offers.
The first major disability suffered by partnership firms, if they do not register, concerns suits between the partners and the firm. No suit to enforce a right arising from a contract or conferred by the Partnership Act, between the partners or the firm, can be instituted in any court. This means that if there are disputes between the partners, or between the partners and the firm, neither the partner nor the firm can sue each other if the dispute relates to rights arising out of a contract or the partnership deed. For example: the right to share profits, the right to access information, the right to participate in management, the right to remuneration, etc.
The second major disability is that suits against third parties, by the partners or the firm, are invalid if the suits relate to rights arising out of a contract. For example, if a buyer from the firm defaults on payment for goods, the firm will not be able to sue the buyer for breach of the purchase contract if the firm is not registered. Thus, unregistered firms are at a great disadvantage compared to registered firms. However, it may be noted that unregistered firms can be sued by others, so the disability is only one-way.
Thirdly, unregistered firms cannot claim the right to set-off as well. For example, if a third party brings an action against the firm to recover some money, the firm cannot claim that the third party also owes money to the firm and, therefore, the third party’s claim should be adjusted against the claim of the firm. This again can severely impact unregistered firms.
Considering the above issues, it is extremely apparent that every partnership firm must consider registering itself to avail itself of several legal rights and to protect its assets.
What about all the partnership firms already in existence? The Partnership Act allows firms to register at any point in their existence, i.e. it is not necessary for a firm to be registered as soon as it is formed. Thus, even firms that were formed many years ago can register now. The process of registration of partnership firms in Goa is largely online through a designated site.
Once registered, the firm must ensure that all further changes to the firm, like changes in partners, changes in address, etc., are updated with the registrar to ensure that they do not face the disabilities discussed above.
Thus, while it is not compulsory to register partnership firms in India, unregistered firms are severely hampered in seeking legal remedies for their issues and disputes. Therefore, it is imperative that most firms consider registering themselves. Registration can be done at any point in time, and it is equally important to keep updating the information in the registrar’s records.
(The writer, a Fellow Chartered Accountant (FCA), specialising in Goods, Services tax, Transfer Pricing and Income tax, is the co-author of the book ‘Comedium of Industrial Policy for MSMEs in Goa’ released by ICAI)
