Consequences of Non-Registration of a Firm
Non-registration of a firm precisely means that the company avoids the incorporation necessities. Continue reading to learn more!
Izhar Ahmad29 Nov, 2023
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The registration of a partnership firm is the formal incorporation of a business. It is what gives the company life. Sections 58 and 59 of the Indian Partnership Act describe the business registration procedure in detail.
Although English Law mandates the registration of firms and imposes fines for non-compliance, the Indian Partnership Act 1932 does not enforce compulsory registration or fines for non-registration of a firm. Nevertheless, Section 69 of the Act introduces specific disabilities for non-registered firms, persuading them to undergo registration.Meaning of Firm
According to Section 4 of the Indian Partnership Act 1932 , the term "firm" describes a collaboration of two or more partners who engage with each other to conduct activities. In simpler terms, a firm refers to a gathering of partners joining forces to undertake and execute business activities.Non-Registration of a Firm Meaning
The fundamental registration concept involves the incorporation of a firm, signifying the process that brings the firm into legal existence. Although no statute precisely defines registration, the incorporation procedure is addressed in Section 58 of the Indian Partnership Act, 1932. Conversely, non-registration, the opposite of registration, occurs when a firm operates without undergoing the incorporation process or initiates activities without obtaining formal registration.Registration of a Firm Procedure
The process of firm incorporation is outlined in Section 58 of the Indian Partnership Act 1932. To initiate this, the firm must complete a form providing specific details such as:- Firm name,
- Address of the participating members,
- Duration of the firm,
- The Original place of the firm, and
- The Location where the firm will conduct its operations.
Difference Between Firm and Company
To distinguish between a company and a firm, this table may assist us in understanding their appropriate differences:| Basis | Firm | Company |
| Legal separation from its members | A firm operates without legal separation from its partners; they function as a unified entity. | A company is legally distinct from its members, maintaining a separate identity. |
| Incorporation | Firm registration is not mandatory, though subject to certain limitations. | Company registration is imperative; non-registration of a firm leads to non-existence in the eyes of the law. |
| Legal statute | Governed by the Indian Partnership Act, 1932. | Governed by the Companies Act, 2013. |
| Members | Requires a minimum of 2 partners; in commerce, a maximum of 20, and in banking, a maximum of 10. | Requires a minimum of 2 members; capped at a maximum of 50 members. |
| Liability | Joint liability. | Separate liability from its members. |
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Consequences of Non-Registration of a Firm
Section 69 of the Indian Partnership Act, 1932 outlines the consequences of non-registration of a firm, including the following:Inability to initiate a civil court suit by the firm or its co-partners against any third party:
If firm registration is neglected, the firm or its representative is barred from filing a lawsuit against a third party for breaching a contract entered into by the firm. The person initiating the suit on behalf of the firm must be a registered partner.Lack of relief for partners in offsetting claims:
Non-registered firms cannot offset claims exceeding Rs. 100 brought against them by third parties. Additionally, pursuing other legal actions to enforce contractual rights is prohibited.Prohibition on aggrieved partners from legal action against the firm or other partners:
Individuals, whether partners or their representatives, cannot legally pursue actions against the firm or any partner (real or alleged) in the absence of firm registration. An exception exists if the firm is dissolved, allowing legal action for dissolution, accounts settlement, and realization of the individual's share in the firm’s assets.Third-party legal action against the firm:
Even without firm registration, a third party retains the right to bring legal action against the firm. It's crucial to note that despite these limitations, non-registration of a firm does not impede certain rights, including:- The right of a third party to sue the firm or any partner.
- Partners’ right to sue the firm for dissolution or settlement of accounts in case of dissolution.
- The authority of Official Assignees or Court Receivers to release the property of an insolvent partner and pursue legal action.
- The right of the firm and its partners to sue or claim set-off, provided the suit's value does not exceed Rs. 100.
Effects of Non-Registration of a Firm
Section 69 of the Indian Partnership Act, 1932 outlines the repercussions for a firm that remains unregistered. The effects include:- Inability to file suits to enforce rights under the Act.
- Inability to file suits to enforce rights against any third party.
- Lack of appropriate relief.
- Partners being barred from bringing legal action against each other.
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Non-Registration of a Firm FAQs
What is the firm registration certificate?
The firm registration certificate is a document confirming the legal recognition of a partnership, obtained after completing the registration process.
Does a firm need to be registered?
According to the Indian Partnership Act of 1932, registering a partnership firm is not required if the business does not have a distinct legal entity.
What do you mean a firm?
A partnership of two or more partners who collaborate with each other to execute operations is referred to as a "firm" under Section 4 of the Indian Partnership Act, 1932.
Is firm and company the same?
No, a firm and a company are distinct legal entities; they are governed by different statutes.
What is the classification of firms?
Firms are classified as partnership firms and limited liability partnerships (LLPs), based on their structure and liability.
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