Partnership Deed

Partnership Deed

Partnership Deed is defined in Section 4 of The Partnership Act, 1932, which states that Partnership is the relation made between two individuals who have agreed to share the profits of a business that has been carried on by all or any of them who was acting for all.

There are two types of Partnership, they are:

1. Partnership at will

A partnership by will is a type of partnership where there is no provision made by contract amid the partners for the duration of their partnership, or for the determination of their partnership.

2. Particular Partnership

A particular partnership is a type of partnership when an individual becomes a partner with another person in a particular venture or for a particular firm or undertaking, such as the construction of a road, laying a railway line, and so forth. This type of partnership shall come to an end on the conclusion of the job for which it was first formed.

Partnership Deed

Partnership deed is basically an agreement which is made between the partners of a company that specifies the terms and conditions of partnership amongst the partners. A partnership firm is the most popular types of organizations in order to start a new business. However, for the smooth and successful running of a partnership firm, it needs good understanding amongst its partners relating to the various policies governing their partnership. The partnership deed usually is made to serve this purpose. It states the various terms relating to sharing of profit or loss, income, interest on capital, drawings, admission of a new partner, and so forth, to bring clarity to the partners.

A partnership deed agreement might be written or oral. Though practically oral agreement doesn’t have any value for tax purposes and consequently, the partnership agreement is suggested to be written.
However, issuing a partnership deed is not compulsory, but it is always better to make a partnership deed in order to avoid any possible disputes and court cases amongst the partners. The agreement could be made between two or more than two partners. It should be stamped and signed by each and every partner.

What are the factors required to form a Partnership Deed?

A Partnership Deed is chiefly formed depending on the following few factors, which are:

1.    A partnership deed is mostly said to be a contract that is made between the partners of the business. This binds each and every of the partners in a legal relationship between the partners.

2.    The minimum requisite for forming a partnership is of two members and there is a limitation of 10 in case of banking as well as 20 in case of non-banking business.

3.    Every partner must have a mutual understanding for carrying out a business.

4.    The ratio for profits and losses must be decided amongst all the partners well in advance.

5.    Every partner must maintain the relationship as a principal-agent. Each partner is accountable for the activities that were carried out by the other partners.

Contents of Partnership Deeds:

A standardized partnership deed must comprise the following details

•    Names and Addresses of the firm.

•    Business to be carried out by the partners of the company.

•    The duration of the partnership firm, relating to whether it is made for a limited period or for a specific venture.

•    Ratio of sharing profits and losses of firm amongst partners.

•    Details of the remuneration, and commission if any, payable towards partners.

•    Capital contribution is going to be made by each partner and the interest on said capital to be paid towards partners.

•    Policy relating to the drawings from the firm allowed to each partner as well as interest if any to be paid by partner, to firm on such drawings.

•    The rate of interest on Partner’s Capital, Partners’ Loan, as well as Interest, if any, to be charged on drawings.

•    The duties and obligations of each partner.

•    Rules that must be followed in case of retirement, death as well as admission of a partner.

•    Division of undertaking and responsibility i.e. the duties, powers, and obligations of each partner.

•    The method of preparing accounts and arrangements for audit.

•    The mode of auditor’s appointment, if any.

•    The treatment of loss that rose out of the insolvency of one or more partners.

•    Settlement of accounts on the dissolution of the partnership firm.

•    The methods to be followed regarding the settlement of disputes amongst the partners.

•    The other related matter concerning the conduct of business. All the matters affecting the association of partners amongst themselves are usually covered in partnership deed.

Additional points:

The Partnership Deed created by the partners is required to be made on a stamp paper in accordance with the Indian Stamp Act and every partner must have a copy of the partnership deed.

A Copy of the Partnership Deed must also be filed with the Registrar of Firms if the firm is being registered.

Absence of a Partnership Deed

If the partners do not take up a partnership deed, the following rules shall be made applicable:

•    The partners shall equally share the profits and losses of the business.

•    Partners shall not get a salary.

•    Interest on capital shall not be payable.

•    Drawings shall not be chargeable with interest.

•    Partners would get 6% p.a. interest on loans to the firm if they mutually consent.

Registration of the Partnership deed in India

Partnerships in India are governed through the Indian Partnership Act, 1932. According to the Partnership Act, Registration of Partnership Firms is not obligatory and is completely at the discretion of the partners. The Partners might or might not register their Partnership Agreement.

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eStartIndia Team

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