The case of legislation involving partnership registration in India can only be defined as negligent. While other countries have updated their constitutions to match the current economic context, partnerships are still governed by the Indian Partnership Act, formulated circa 1932. This act is nothing but a remnant of our shabby colonial era. It even states that the registration of your partnership firm is not essential!

For those of you who think that your business partner is inviolable, you might want to think again. While we don’t view business partnerships in a suspicious light, we believe in being prepared for any eventuality. Tabloids all over the world are full of court battles between partners, and quite a few of them didn’t even make it to court because legal matters weren’t in order.

Beyond that, the market is extremely cutthroat. By this, we don’t simply mean that you’ll have to be wary of your competitors, but also your vendors and all the actors that make up your business ecosystem. If you have any issues against a third party, you might find yourself severely stunted when it comes to taking legal action.

To avoid such unpleasant occurrences, this article will detail the fine points of registering a partnership firm. I will talk about the legislative aspect of doing so, followed by the advantages you’ll have if you choose to register the firm.

First, let us deal with what you CANNOT do, if you choose NOT to register your partnership firm.

  1. If you’re a partner in an unregistered partnership firm, you cannot file a suit against the firm and the co-partners.
  2. You cannot file a suit against a third party to enforce a right that is contractual.
  3. You cannot claim a set-off exceeding Rs. 100 (a laughable sum by ANY measure!) in value against a third party to enforce a right that is contractual.

Note: What is a set-off? If a third party sues your firm, saying that you owe them some money, you can file a set-off. This indicates that they owe you money too, and if what you owe them is greater, that amount can be deducted from the claim. You can see how detrimental it can be if you can’t deduct more than a mere Rs 100.

Even if you do trust your co-partners implicitly, points (2) and (3) refer to third-party providers. Given the fickle nature of affairs in a business, you might want to offset this very obvious risk by taking proper precautions against it.

So, do you have any rights, if you haven’t registered the company? Thankfully, you do. We’ve compiled a list here for your reference.

  1. A third party has the right to sue even an unregistered partnership firm or any partner of such firm.
  2. Every partner has right to sue for dissolution of the firm, accounts after dissolution and realization of property after dissolution.
  3. An unregistered firm can claim a set off not exceeding Rs. 100 in value against a third party to enforce a right arising out of a contract.
  4. You can challenge the rights a firm that has no place of business in India.

As you can see, this is not much of an advantage. You can only have an effect on other unregistered firms, given that you are the third party. Dissolution is an option, but ideally speaking, it will not be needed until things are at breakpoint. Point (3) is basically telling you that you can claim a set off for a hundred bucks. Point (4), again, is highly situational.

The takeaway from this is simple. Despite the lackadaisical judicial advice, you’re better off registering your firm. The annual filing is optional, the setup is now easy, compliances have been reduced, and the expenses are only offset by the money you will bleed if you face any judicial issues.

So, go ahead and register your partnership firm today to avoid problems in the future.