Registration and Dissolution of Partnership Firm

By | March 20, 2021
Registration and Dissolution of Partnership Firm

Registration and Dissolution of Partnership Firm | Overview

The present article separately discusses the procedure of registration and dissolution of partnership firms under the partnership act. It gives an overall brief overview of the registration and dissolution procedures and what all compliance the process is going to require as per the act.

I. Introduction

A Partnership is one of the most significant forms of a business organization, where two or more two people come together to run a business and divide the profits and shares thereof in an agreed ratio between the partners of the firm. The partners of the firm sign a partnership deed which is an agreement governing the rights, duties, profits shares, and other obligations of each partner. A partnership deed can be in a written or oral form, although it is always recommended to write a partnership deed to avoid any possible conflicts in the future,

In comparison to the company’s law and regulations, a Partnership is easy to form and requires minimal compliance. The concept of Partnerships is governed by the Indian Partnership Act, 1932. While the registration of a partnership firm is important, the process is optional and at the sole discretion of the partners of the firm.

The registration of a firm may be done at any time but before the start of the business or anytime during the continuation of the partnership. Now, registration of partnerships becomes significant because once the firm is registered, it gets to enjoy special rights which are not available to the unregistered partnership firms. Therefore, to establish and run a partnership firm, it is crucial for you to get it registered under the statute, following all the required procedures.

II. Procedure for Registration of a Partnership firm

Under the Indian Partnership Act, 1932, the registration of a partnership has not been made mandatory. The reason behind this is that an unregistered partnership firm suffers from certain limitations and restrictions; hence the registration of a firm is a desirable option. The registration of a partnership can be done at any time. To get a firm registered in accordance with the procedure laid down in the act, a simple procedure is required to be followed under the law:-

Choose a name

Every business needs to have a unique name for its representation before the general public. The name of a new business cannot be the same as a prior registered firm or company. Therefore, it is necessary that you check the name that you have chosen has been taken by any other firm. Further, your firm needs to have a unique domain name and trademark that should be registered to keep others from misleading the public with similar names.

Draft a Partnership Deed

The partnership deed mentions the rights and duties of each of the partners in the partnership firm. At a minimum, the partnership deed consists of the name and address of the firm, name, and address of partners, nature of the conduct of business, expiry period of the partnership, capital contribution by each partner, and profit-sharing ratio of each partner.

These are some of the basic details a partnership elaborates upon about a firm. Besides this, the deed also comprises some additional clauses depending upon the requirement or desire of the partners. Some of the examples of additional clauses are:

  1. Procedure for admission of a new partner.
  2. Powers and responsibilities of partners.
  3. Commissions or salaries payable to each of the partners.
  4. The interest of the partner’s capital contribution.
  5. Audit procedure.
  6. Retirement procedures.

The legal validity of partnership deeds is done by drafting it on a stamp paper in proper format and getting signed by each of the partners in front of a notary. Not to mention, one is required to pay taxes for the partnership firm, so a PAN card is also a requirement for the validity of the registration of the partnership firm.

  • To complete the registration process, fill the registration application which includes all the basic yet relevant details about the partnership firm and its partners. The application must be duly signed by each of the partners.
  • Submit the registration application to the registrar of companies and pay the prescribed fees to get done with the registration process. Please note that a partnership does not get registered until all the fees and duties are paid.

The Registrar then reviews the registration application and the necessary documents attached to it and if everything is alright, the certificate of registration is issued within a week. The registrar of firms must be satisfied that all necessary registration formalities have been completely complied with and then he makes an entry of the firm named in the register of firms. From thereon, the firm is known to be registered. Upon completion of registration, the registrar of firms issues a certificate called ‘registration certificate’ to the firm. It is to note that the register of the firm remains open for inspection but on payment of a prescribed fee for the same.

III. Procedure for Dissolution of a Partnership firm

There are various modes through which a partnership firm can be dissolved. They are dissolution by mutual consent, dissolution by notice, dissolution due to contingencies, compulsory dissolution, and dissolution by the court. Each of the dissolution modes has its own clauses and contingencies which should meet the fulfilment of the dissolution.

Moreover, it is pertinent to note that there exists a difference between the dissolution of partnership and the dissolution of partnership firms. Dissolution of partnership is said to happen when a partner ceases to be a member of the firm, whereas dissolution of the firm is termed for the winding up of the business. Section 39 of the Partnership act provides that “the dissolution of the partnership between all the partners of a firm is called the dissolution of a firm.”[1]

It means that in case of dissolution of the partnership, the business of the firm doesn’t come to an end but a new agreement is signed between the remaining partners, detailing the revised clauses that will govern their relationship. On the other hand, with the dissolution of the firm, the business of the firm is also closed up. Therefore, it can be said that the dissolution of a firm implies the dissolution of the partnership but the dissolution of the partnership does not imply the dissolution of the firm. Let us discuss each of the ways in which a firm may get dissolved:

Dissolution by agreement

The partnership firm may be dissolved at any time in accordance with a contract already made between the partners.[2]It is important that the agreement for the dissolution of the firm is reached with the consent of all the partners, be it a partnership at will or for a fixed period. A partnership can be dissolved as per the terms enshrined in the partnership deed or of the separate agreement.

Compulsory dissolution

As per Section 41 of the act, in case of the following events, a firm stands compulsorily dissolved. They are as follow:

  • Insolvency of partners: By adjudication of all the partners or all the partners except one as insolvent, or
  • By the happening, of any such event that may have made the business unlawful.

Dissolution due to contingencies

A firm stands dissolved on the happening of any of the following contingent event[3]:

  • Expiry of the fixed period: If the partnership is constituted for a fixed period of time, then on the expiry of such period, the firm gets dissolved.
  • Achievement of a specific task: The firm gets dissolved on completion of the venture of the firm for which it was formed.
  • On the death of a partner.
  • On the adjudication of a partner as an insolvent, the firm gets dissolved unless there is a contract to the contrary.
  • On the resignation of a partner, the partnership stands dissolved.

Dissolution by court

Provided under Section 44 of the Indian Partnership Act, dissolution of a partnership firm by a court of law may be done on the following grounds.

  1. The insanity of Partner: In case any of the partners is of unsound mind then his insanity becomes the ground for dissolution of the partnership.
  2. Incapacity of Partner: If any of the partners have become permanently incapable of performing his duties and obligations as a partner of the firm, the court may order the dissolution of the partnership.
  3. Misconduct of Partner: misconduct by any partner is likely to prejudicially affect the business of the firm.
  4. Constant breach of the agreement by partner: A partner willfully commits a constant breach of the partnership agreement regarding the business conduct of the firm.
  5. Transfer of interest: When a partner permanently transfers his interest or share in the firm, but unauthorized, to a third party, the court may order for dissolution of the firm.
  6. Continuous losses: The partnership firm may get dissolved on court’s order if it is continuously suffering losses and there’s no more capital available for the firm’s future growth.
  7. Just and Equitable: The court may order the dissolution of the firm on any other ground which the court thinks is just, fair, and equitable.[4]

IV. Conclusion

Although the registration of a partnership firm is not mandatory in India as per the Indian Partnership Act, 1932, it gives a legal existence to the firm. Also, it is easier to convert the partnership firm into other entities like a company or LLP, etc. later. Further, all the method by which a partnership firm may get dissolved is discussed sufficiently enough to make you aware of the procedures involved in the registration and dissolution of a partnership firm.

[1] The Indian Partnership Act, 1932, sec. 39.

[2] The Indian Partnership Act, sec. 40.

[3] The Indian Partnership Act, sec. 42.

[4] Havidatt Singh v. Mukhe Singh, A.I.R. 1973, J&K.

  1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
  2. Legal Bites Academy – Ultimate Test Prep Destination
Author: Deepshikha

Deepshikha is a law student from National Law University, Odisha.

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