Two friends start a printing press. A customer owes them Rs 4 lakh and stops answering the calls. They take legal action, but the court says the case can not proceed because their company was never registered.
This happens more often than most entrepreneurship guides admit. Registration is voluntary according to the Indian Partnership Act, 1932. But section 69 disallows an unregistered firm from suing a buyer or another partner to enforce a contract.
Everything below in this article explains the legal difference between registered and unregistered partnership firms in India and what that means for your business.
Difference Between Registered and Unregistered Partnership Firm in India: Tabular Overview
This clear difference between unregistered and registered partnership firm in India will provide you a more clear image of what you gain and lose.
| Point | Registered Firm | Unregistered Firm |
| Entry with registrar of firm | Yes | No |
| Can sue a customer or vendor for contract due | Yes | No |
| Can one partner sue another over partnership agreement | Yes | No |
| Can outsider sue the firm | Yes | Yes |
| Bank loan & trust | Easier | Harder |
| Details on public record | Yes | No |
| Upfront Cost | Registration fee & Paperwork | None |
An unregistered firm can run daily business without trouble. The gap shows up only when something goes wrong and by then it is too late to fix it easily and cheaply.
What is a Registered Partnership Firm?
A registered partnership firm is one whose details are recorded with the Registrar of Firms of your state. The record contains the name of the partnership, place of business, names and address of the partners and date of partnership with each partner.
Some common misconceptions: Registration makes the business a distinct legal entity. Partners in a partnership will still be individually liable for its debts, registration does not convert it into a company or LLP. Registration simply provides you with the ability to access a court of law – it does not in itself grant you limited liability.
What is an Unregistered Partnership Firm?
An unregistered partnership firm is formed between two or more persons by a contract, whether oral or written, to establish a business and to share profits. It is lawful. You may sign contracts, employ staff, generate income and pay tax.
You can also complete GST registration and file returns without a firm registration certificate. The only exemption seen in the tax office is that they primarily demand for your deed & PAN. Similarly, the income tax law is more concerned with the existence of a deed and not a registered firm. As a result, lots of small shops & family firms operate unregistered for decades without any issues.
Legal Consequences of Not Registering (Section 69 Explained)
The consequences of non registration of firm come from Section 69, and they are the main legal disadvantages of remaining unregistered.
What un-registered firm can not able to do:
- There shall be no civil suit by any partner of any firm, or any other partner, to enforce any right arising out of the deed of partnership or under the Act. (Section 69(1)).
- The firm will be unable to bring an action against an outsider for enforcement of the right that attaches through contract (Section 69(2)).
- Both must be registered and the individual applying as a partner on the register must be identical in person.
What they still can do:
- It can be sued by customers, suppliers or banks. The bar works in only one direction
- It can establish a set-off in a suit instituted against it.
- A partner may sue for a dissolution of the firm or for an account of a dissolved firm.
- The court can also litigate small claims of even 100, although this is an exception that no longer so often contributes.
It can sue where the right does not come from a contact; for example, in Haldiram Bhujiawala v. Anand Kumar Deepak Kumar (2000) The Supreme Court on unregistered partnership firm matter held that a trademark case could be filed as that is a right of law and not of any contract.
Here a question occurs: Can you register later? Yes, registration is allowed at any time. But the bar applies on the day you file a suit, so registering after filing does not rescue that case. The disadvantages of an unregistered partnership firm are therefore avoided only by registering before a dispute starts.
Advantages and Disadvantages of Registering Your Firm
The advantage of registered partnership firm are practical:
- Enforceable rights: Unpaid invoices can be recovered and you can enforce your deed in a court.
- Credibility: A registration certificate of the firm adds to the credibility of the business in the eyes of banks, vendors and large clients. Loans to the business become easy to get.
- Simpler changes: we report changes of ownership with the Registrar; wrenching a partner is the easiest.
- Growth potential: It’s easier to expand as an LLP or private company if the business has an established history.
The disadvantages are bit small:
- Fee and paperwork: You pay stamp duty and a government fee.
- Updates: Changes in partner, address or firm name All changes should be made to the Registrar.
- Public record: Partner information is accessible to anyone who searches the register.
If you are planning to take on larger clients, tenders or lenders, these costs are peanuts compared to the nightmare of a blocked lawsuit.
How to Register a Partnership Firm in India
The 4 step process to register a partnership firm in India is very simple and easy, just follow this guide and you will understand the complete process.
- Draft a partnership agreement that clearly states: capital, profit sharing, and each partner’s responsibilities; termination and dispute regulations.
- Pay stamp duty as per your state.
- File Form 1 along with the deed and documents at the Registrar of Firms office. Filing is now available online in many states.
- The Registrar verifies the information, records the firm in the directory and provides the registration certificate.
Document required for partnership firm registration:
- Partnership deed printed on stamp paper
- Form 1 application, signed by all partners
- Application letter for proof of address of the company (utility bill and rent agreement for the business place)
- PAN and address proof of every partner
- Passport-size photographs
Most registration will take about 7-15 business days (may vary from state to state with fees). If you find the paper work complicated, you can contact partnership firm registration consultants,
Like Regible Corporate LLP (Trusted consultant for partnership firm registration) who tell you about the deed, what documents and what steps to follow and you can avoid the body going personally to the office so you do not have to worry about other things.
Final Say:
The registration of a partnership is optional under the provisions of the Indian Partnership Act, 1932. However, section 69 of the Act prohibits any unregistered partnership firm to file a suit to enforce any contract. Register in advance, as late registration will not validate a pending suit. Draft an efficient partnership deed, arrange all necessary documents, and apply to the Registrar of Firms in your state using Form 1.
