Partnership Firm Registration: Know its Benefits and Shortcomings

Everything in this world is replaced by a better alternative. That’s how the world moves forward. In terms of anthropology, the homo-erectus species were replaced by the homo-sapiens because the latter effectively survived the environmental changes on the planet more than the former. Men were replaced by the much more efficient and cost-effective machines in the industrial revolution. Radios were replaced by FMs, cables towers were replaced by Satellites and Telephones by mobiles, mobiles by smartphones, and so on.  

Talking in terms of business, the single ownership of a business entity, i.e. inception, operation, direction, management, and maintenance, everything is done by a single individual also turned out to be less productive. Therefore, in the early 1900s, the world came up with a different and better solution to conduct their business operations more effectively. Multiple members sharing same vision to produce a commodity(s) and/or service(s) came together to form an organization to conduct their business activities. This form of setup for conducting business operations is known as a Partnership Arrangement. These partnership arrangement has been used by the different forms of organizations in the world. It has proved its usefulness over the decades.

This special arrangement of partnership among two or more individuals allows them to conduct their business activity efficiently and likewise distribute the profits among them, or incur the losses suffered by their business setup.

In India, the legal structure of the constitution allows you to register your partnership arrangement and make it into a partnership firm registration or partnership company. The member partners of a partnership arrangement can apply and register for a legal permit or say a license to conduct themselves as a legal entity in the market and commence their business operations. This partnership arrangement is defined in a composed or oral form of listed regulations which contains the

• The chosen name of the partnership firm registration
• Details of its member partners
• Capital contribution by each partner
• Profit-sharing and loss-incurring arrangements among the partners
• Duration of the partnership

Such a set of regulations put forth by the member partners and mutually agreed upon is called a Partnership deed or Partnership agreement. Now, it is not mandatory to register a partnership arrangement among a few people into a partnership registration. There are many unregistered partnership firms in the country. But they are at all kinds of risks which makes them a risky pursuit for its member partner(s). Let us look at some of them in detail.

An unregistered partnership firm suffers the following disadvantages:

Since the partnership firm is not registered, it is not a legal entity in the eyes of law enforcement and so, the authorities cannot impose anything on such arrangements. A member-partner of an unregistered partnership firm cannot file a lawsuit against the firm or any of its partner(s) to enforce any of his/her rights arising from the partnership deed. For example, if your partners don’t allow you to withdraw your capital from the firm or respect the profit-sharing arrangement mentioned in the partnership deed, then you cannot take them to court, because your firm is not registered and an unregistered agreement is null in the eyes of law.

An unregistered firm cannot sue any third party in case of a violation of a contract because any lawsuit filed by an unregistered firm is not valid. The firm must register itself and the member-partner or any designated person suing on behalf of the firm must be shown in the Register of Firms.

Therefore, it is imperative that you register your partnership firm in the eyes of law so that you can save yourself from the losses you incur in case of violation of your partnership agreement.

Benefits of Partnership Firm Registration

Listed below are some of the benefits of registering a partnership firm.

• Expertise and knowledge: Partnership with someone can give the business and its existing member-partners to bridge the gap in their expertise and knowledge. Every member partner has something to contributes to the business arrangement, which the others may lack in terms of experience and knowledge.
• More funds: A partnership firm registration creates more influx of funds as the member partners may have strategic connections to raise capital for the business by bringing in more investors.
• Distributed financial burden: The financial burden of a firm can be shared by the member partners of the firm. Capital expenditure, production cost, and operation & maintenance expenses can take a toll on the sole controller, so the partnership arrangement can have more substantial savings.
• Tax benefits: A possible advantage of a general partnership is the tax benefit. A general partnership, in certain cases, does not pay income taxes. So the member partners can deduct any business losses from their tax returns.
• New Perspective: It's harder to find blind spots in how a person conducts his/her business. In a partnership firm registration, you get a fresh perspective on the existing methodologies you use to run your business and spot those blind spots that one has missed.
• More productivity: Sharing the labor of governing an enterprise with other member partners makes you more productive. Then you have more ease and flexibility in dispensing your duties and can, as time permits, pursue more business opportunities. 

Shortcomings of Partnership Firm Registration

Like I have said before, everything in this world is replaced by a better alternative, and so is the case with partnership firm registration as well. As the business progresses, issues are inevitable. A innovative approach at one time becomes an obsolete process with the time.

Partnership firm registration arrangements also have such issues. We have discussed some of them in the following points:

• Member partners bear Unlimited Liability:
  • Each loss incurred by a partnership firm registration is personally liable on the member-partners of the firm.
  • The liability created by a partner in the partnership firm registration will also make each of the partners personally liable.
  • To unburden the member-partners from the unlimited liability, the government has proposed a better partnership alternative, which is, the Limited Liability Partnership (LLP).
• Restriction in partnerships: The number of member-partners in a partnership firm is restricted to 20. Whereas in the case of a Limited Liability Partnership, there is no such restriction.
• Bus system rather than a star system: In a partnership firm registration, there is no leadership. This lack of leadership can turn the firm directionless. Everyone will have their stakes and opinions and there is a possibility to get stuck in an impasse. This impedes the growth of business. One solution is to designate certain powers to an appointed individual in the partnership firm to impart some leadership ability wherever it is required.
• Trust of the General Public: A partnership firm registration operates without much of a structure and regulations, hence, the masses have a hard time trusting them.
• Abrupt Dissolution: In case of the demise of a member partner of insolvency or if a partner leaves the firm, then the partnership firm will be dissolved. This abrupt dissolution wrecks the hard-earned business empire created by the member-partners of the firm. Whereas in the case of an LLP, continuity of business is not affected by the leave of partner(s).

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.