Consequences of Non-Registration of Partnership Firm
A Partnership is a model of business entity where two or more individuals or entity, form an alliance to manage and operate a business for profit. The Persons, Businesses or entities who collectively agree to cooperate to advance a business are individually known as Partners. Registration of partnership firm mandatory as per the provision of Act, but have some consequences of Non-Registration of Partnership Firm.
Partnerships are a common way for people with insufficient time, Skills, capital or other resources to pool these means and to run a business together. Another major reason why businesses are started on partnership basis is that an individual person or entity doesn’t have all the varied expertise and skillset required to run a Business smoothly and to serve the consumers efficiently, so they come together in association to overcome these hurdle and reach a greater consumer base. The right business partnership can enhance the ethos of the business.
Registration of a Partnership Firm:
If the partners want to register their firm an application in prescribed form with prescribed fees must be delivered with the Registrar of Firms of the state where the firm is located.
The application must include Provisions of Partnership Deed enclosing the following details:
- Name of the firm
The partners must decide a proper name for the Firm after taking into consideration the regulations of Indian Partnership Act.
- Details of the partners
Major Details of each and every partner must be included in the application.
- Business of the firm
A brief description about the type of business activity that the firm will be undertaking.
- Duration of firm
The duration for which the partnership is constituted must also be taken into consideration while filing the application i.e. whether partnership is for a fixed adventure or is it general partnership.
- Place of business
The Place or Permanent Address where the firm will undertake its business activities must be included in the deed.
- Capital Contribution of Each Partner
The amount contributed by each partner as Capital must also be included in the deed.
- Profit Sharing Ratio
The application must include the ratio in which the profit and losses of the firm will be divided.
- Salary and Commission
Whether any salary or commission will be provided to any partner for any services or efforts they have put in for smooth functioning of the business, must be included in the deed.
- Interest on Capital / Interest on Drawing
Whether any interest on capital will be allowed or Interest on drawing will be received, to and from any of the partners should also be highlighted in the application.
- Interest on Loan from Partners
If (in case) any partner have advanced any loan to the firm, what will be the rate of interest to be paid on that loan should be decided and included in the deed. (If the deed is silent on this particular topic, 6% interest is paid on the loan that is been advanced by the partner).
Although the Indian Partnership Act doesn’t make does not make the registration of partnership firm mandatory, but not doing so have some consequences such as the Firm :-
- Cannot File a Suit Against a Third Party or a Co-Partner:-
A partnership firm that is not Registered cannot file a suit against a third Party or any other Co-partner and thus no legal Action can be taken against them in any case of Disagreements or Conflicts.
- Third Parties Cannot be stopped from suing the Unregistered Partnership Firm:-
An unregistered firm cannot sue a Third party but a Third party can file a suit on the firm and they cannot be stopped from doing so.
- Partners cannot file a suit against another Partner:-
If the firm is unregistered the Partners cannot sue or take any legal action against any of the other Co-Partners in case of conflicts, unsettlements or breach of Promises.
- Conversion To Another Entity Becomes Impossible:-
An Unregistered firm cannot be converted to any other Entity such as Limited Liability Company (LLP) or any form of Company.
- Unregistered firm cannot claim any tax benefits or deductions:-
An unregistered firm cannot claim any tax benefit or any Tax write offs.
- No claims can be set off:-
An unregistered firm cannot set off any claim which exceeds Rs.100/-
- The right of any of the partner to file a suit at the time of dissolution of the firm for the accounts or to enforce any right or power to realize the property of the firm.
- The power of an Assignee or receiver to realize the property of an insolvent partner.
- The right of a Third party to file a suit or take any legal action on the unregistered firm or its partners.
- The right to sue a third party for Breach of a patent right.
Benefits of Registration of Partnership Firm
- A registered firm have a right to sue a Third Party in case of discrepancies in order to set off claims.
- If there are conflicts among Partners, they can settle the dispute in the Court as Partners of a Registered Firm can sue their Co-Partners.
- A registered Partnership firm has a better Reputation and credibility in the market.
- A registered Partnership firm have better business opportunities due to reliability and credibility will eventually enjoy a better Goodwill.
- A registered partnership firm have an ability to easily convert to any other form of business entity.
- A registered partnership firm and its Partners can claim Tax benefits and avail benefits.
The partnership firm is a widely chosen business structure that offers a multitude of benefits, ranging from shared responsibilities to ease of management. However, it’s essential to underline the significance of registering your partnership firm. Registration not only provides legal recognition but also ensures transparency, credibility, and a structured framework for your business operations as the partnership firm structure offers flexibility and simplicity, registering it elevates your business to a new level of professionalism and reliability. It’s not just a legal obligation but a strategic move that can unlock opportunities, mitigate risks, and pave the way for long-term success.
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