This article is written by Bismi Basheer, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.

Introduction

In India, a partnership deed is governed by the provisions of the Indian Partnership Act, 1932 and the Indian Contract Act, 1872 for matters that the partnership act does not have any specific provisions. A partnership is basically a type of business setup where two or more persons, up to a maximum of 20, can jointly carry out a business as opposed to a single individual carrying his own business with his own capital and resources. If the business in question is a banking business then the maximum number of persons that can be in a partnership is 10. A partnership requires these persons to enter into an agreement, called the partnership agreement that lays out the various rights and obligations of the concerned parties. It is not mandatory under the Indian Partnership Act for a partnership to be registered. However, registered firms carry clear legal advantages over unregistered firms. There exist certain conditions that must be satisfied in order to form a firm, and a Partnership deed is an important condition.

What is a partnership?

A partnership is defined under section 4 of the Indian Partnership Act as – the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into a partnership with one another are called individually “partners “ and collectively a “firm”, and the name under which their business is carried on is called the “firm name”. 

The definition of partnership contains three essential elements; 

• An agreement must exist between the persons,
• The agreement must be made to share whatever profits earned amongst the partners, 
• The agreement must be to carry out the business by all of them jointly or by one person acting on all of their behalf.

For example,

X who wants to run a bakery approaches Y, an independent baker. Together they buy a shop and decide to start selling cakes and divide the profits between each other. This is a partnership and X and Y are the partners in this business.

What is a partnership agreement?

A partnership agreement is basically the foundation of a partnership firm. It specifies the business that will be carried out and the partners that are going to be involved and also identifies the firm and gives a clear outlook of the terms laid out by the partners. Each and every partner has the right to participate in the business based on their terms and conditions. Therefore, the agreement also makes clear the different kinds of partners and their rights and responsibilities to the business as well as to each other. It can be written, oral or sometimes even implied through the conduct of the parties that entered the agreement. The written agreement is referred to as a partnership deed. 

Stamp duty considerations for partnership deeds

Stamp duty is basically a form of tax that is required to be paid on documents and that which provides it with legal enforceability and evidentiary value in court. As laid down in section 58 of the Indian Partnership Act, an important document required for the registration of a firm is a partnership deed. This Partnership deed is liable for stamp duty under the Indian Stamp Act, 1899. The deed must be executed and attested as a bond on a non-judicial stamp paper of proper/appropriate value. It must cover information such as the name of the firm, partners involved, address of the firm, the division of profits, mode of operation, dispute resolution etc. In India, stamp duty differs from state to state, from instrument to instrument and also according to the capital brought in by the partners. Let’s take a look at stamp duty considerations for some of the different states in India for the registration of partnership deeds and the conditions by which they may vary.  

The above table consists of the stamp duty charges that are levied by some of the leading business-oriented states of India. There is an evident difference when we examine the conditions of each state. Some states seem to have a uniform stamp duty despite the differences in the capital while some states have varying rates according to the different capital brackets. Some even have mentioned the maximum as well as the minimum amount of stamp duty that can be charged. For every partnership firm, the stamp duty charged for their partnership deed will depend on the state in which the firm is established or going to be established.

Procedure for registering a partnership firm

Section 58 of the Act is the provision that lays down the general procedure for the registration of any partnership firm. Every state has its own process of registration where the process can either be through online websites or through an offline procedure. However, the basic procedure requires the following documents:

• The application form of the prescribed format,
• The notarized partnership deed whose stamp duty charges has been paid to the sub-registrar, 
• The firm’s address proof,
• The identity proofs of the partners, 
• The address proofs of the partners, 
• Photo proofs of the partners. 

A copy of the partnership deed must be sent to the Registrar of Partnership Firm of the locality in which the business is going to be situated or is situated along with the application form thoroughly filled out. This application must be signed by all the partners and paired with an affidavit declaring all the details provided to be true. When the Registrar is satisfied and finds that all are rightly in accordance with the conditions of section 58, an Acknowledgement of the firm is issued. The time period for registration of a firm can vary from state to state.

Importance of registering a partnership firm

Registering a Partnership firm is not compulsory (with the exception of states like Maharashtra.) and is optional under Indian law. However, it is highly advised that an unregistered firm or its partners cannot seek remedy from a civil court to enforce any right arising from a contract. The effects of Non-registration are stated in Section 69 of the Indian Partnership Act, 1932. The legal disadvantages non registered firms can face are listed as follows:

• The inability to file a case against a third party for breach of contract,
• How the third party can file a case against the firm,
• How in case of a dispute the firm cannot claim any relief or set off.

As an exception to this scenario, the partner of an unregistered firm may file a suit during the time of dissolution of the firm regarding matters of the accounts of the firm after dissolution or regarding the partner’s shares in the assets of the firm. Thus due to these above mentioned legal complications that can and may arise, it is highly advised that firms do get registered. 

Conclusion

At times of scarce resources and abandoned ideas due to lack of capital, partnership firms are a wonderful option for like-minded people to come together and create new, promising businesses. With a clear division of labour, skills and profits these types of businesses have a higher chance of making it than single owned businesses. This is also why the importance of registration of the partnership firms is continuously stressed despite their non-mandatory nature by law. Registration promises more legal security to the involved partners as well as more legal enforceability in a court of law upon future conflicts and complications that may arise internally as well as externally in the business. The only and main disadvantage general partnerships face is the problem of unlimited liability partners are subjected to when it comes down to losses and legal consequences regardless of their involvement and shares. This has led to a change in trend and has given rise to limited liability partnerships or LLPs.  

References

1. http://www.legalservicesindia.com/article/158/Indian-Partnership Act,1932.html
2. https://www.setindiabiz.com/learning/stamp-duty-on-partnership-llp-agreement-of-several-states/
3. https://housing.com/news/stamp-duty-for-partnership-deed-india/

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