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LAB/U2 Topic 7 Registration of Partnership, Dissolution of Partnership firm

Registration of Partnership

A Partnership is one of the most important forms of a business organization, where two or more people come together to form a business and divide the profits thereof in an agreed ratio. A Partnership is easy to form, and the compliance is minimal as compared to companies.

Name given to the Partnership firm

Any name can be given to a partnership firm as long as you fulfill the below-mentioned conditions:

  • The name shouldn’t be too similar or identical to an existing firm doing the same business,
  • The name shouldn’t contain words like emperor, crown, empress, empire or any other words which show sanction or approval of the government.

How should be the agreement between partners formed?

Partnership deed is an agreement between the partners in which rights, duties, profits shares and other obligations of each partner is mentioned.

Partnership deed can be written or oral, although it is always advisable to write a partnership deed to avoid any conflicts in the future.

Following details are required in a partnership deed: 

  1. General Details:
  2. Name and address of the firm and all the partners
  3. Nature of business
  4. Date of starting of business Capital to be contributed by each partner
  5. Capital to be contributed by each partner
  6. Profit/loss sharing ratio among the partners
  7. Specific Details:

Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a later stage:

  1. Interest on capital invested, drawings by partners or any loans provided by partners to firm
  2. Salaries, commissions or any other amount to be payable to partners
  3. Rights of each partner, including additional rights to be enjoyed by the active partners
  4. Duties and obligations of all partners
  5. Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of firm.
  6. Other clauses as partners may decide by mutual discussion

Is it necessary to register a partnership firm?

Indian Partnership Act, 1932 governs the partnerships. Registration of partnership firm is optional and at the discretion of the partners.

Registration of partnership firm may be done at any time – before starting a business or anytime during the continuation of partnership.

It is always advisable to register the firm since a registered firms enjoy special rights which aren’t available to the unregistered firms.

How to register the partnership firm?

An application form along with fees is to be submitted to Registrar of Firms of the State in which firm is situated. The application has to be signed by all partners or their agents.

Documents to be submitted to Registrar are

  • Application for registration of partnership (Form 1)
  • Specimen of Affidavit
  • Certified original copy of Partnership Deed
  • Proof of principal place of business (ownership documents or rental/lease agreement)

If the registrar is satisfied with the documents, he will register the firm in Register of Firms and issue Certificate of Registration.

Register of Firms contains up-to-date information on all firms and can be viewed by anybody upon payment of certain fees.

Dissolution of Partnership firm

Dissolving a partnership firm means discontinuing the business under the name of said partnership firm. In this case, all liabilities are finally settled by selling off assets or transferring them to a particular partner, settling all accounts existed with the partnership firm.

Any profit/ loss is transferred to partners in their profit sharing ratio as agreed by them in the partnership deed.

Dissolving a partnership firm is different from dissolving a partnership. In the former case, the firm ends its name and hence cannot do business in the future. But in case of dissolving a partnership, the existing partnership is dissolved– by consent or on happening of a certain event, but the firm can retain its existence if remaining partners enter into a new partnership agreement. There are different ways in which a partnership firm may get dissolved-

When partners are mutually agreed

It is the easiest way to dissolve a partnership firm since all partners have mutually agreed upon closing the partnership firm. Partners can give a mutual consent or may enter into an agreement for the dissolve. 

Compulsory Dissolution

A firm may need to be dissolved compulsorily if:

  • All partners or all partners except one partner are declared insolvent
  • The firm is carrying unlawful activities like dealing in drugs or other illegal products or doing business with alien countries or other countries that may harm the interest of India or doing other such activities.

Dissolution depending on certain contingent events

Upon happening of certain events, a firm may be required to get dissolved:

  • Expiry of fixed-term– Partnership formed for a fixed term will get dissolved once the term gets over.
  • Completion of task– Sometimes, a partnership is formed for a certain task or objective. Once the task is completed, the partnership will automatically get dissolved.
  • Death of the partner– If there are only two partners, and one of the partner dies, the partnership firm will automatically dissolve. If there are more than two partners, other partners may continue to run the firm. In such case, only the partnership will get dissolved, and other partners will enter into a new agreement.

Dissolution by notice

If a partnership business is at will, any partner can dissolve the partnership by giving an advanced notice. Notice will contain a date from which dissolution will be effective.

Dissolution by Court

If any of the partners becomes mentally unstable or misbehaves with the other partner(s) or doesn’t abide by the clauses of the agreement, the other partner(s) may file a case in the court to dissolve the firm. But a court can dissolve the firm only if it is registered with the registrar of firms. Hence an unregistered partnership firm can’t be dissolved by the court.

Transfer of interest or equity to the third party

If any partner transfers control in the form of interest or equity to a third party without consulting other partners, the partner(s) may dissolve the firm.

Partners still liable to third parties

Until a public notice of dissolution is given, partners remain liable for any act done by any of the partners which would have been an act of the firm, if such act was done before resolution.

If a partner has been declared insolvent or has retired from the firm, he will not liable for any acts done after his insolvency or retirement. The legal heirs of any deceased partner are also not liable for any acts done by other partners after the partner has died.

How are accounts settled

Accounts of the firm are settled in the following order–

  • Losses of the firm will be paid out of the profits, next out of the capital of the partners, and even then, losses aren’t paid off, losses will be divided among the partners in profit sharing ratios,
  • Assets of the firm and the capital contributed by the partners to set-off losses of the firm will be applied in the following order–
  1. Third party debts will be paid first
  2. Next, loan amount taken by firm from any partner will be repaid to that partner
  3. Capital contributed by each partner will be repaid to him in the capital contribution ratio
  4. Balance amount will be shared among the partners in their profit sharing ratios.
  • Upon realization, all assets will be sold off in the market, and the cash realizing out of such a sale will be used for paying the liabilities. Assets or liabilities may also be taken over by the partner(s) for which the respective partner capital accounts will be adjusted by such amount.  

Premium to be returned on premature dissolution

If a partner paid a certain premium for entering into a partnership for a fixed term, and the firm is dissolved before the end of fixed term, the firm is liable to repay the partner his premium amount. But few conditions are attached with this –

  • Firm isn’t dissolving due to death of a partner
  • Dissolution shouldn’t be happening due to his misconduct
  • Dissolution is happening on the basis of an agreement that contains no provision for repayment of full or a part of the premium.
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