32 week ago — 16 min read
This article privides indights on the critical provisions within a Partnership Deed, covering aspects such as capital contribution, profit distribution, management roles, dispute resolution, and more. Understanding these elements is crucial for partners to establish a solid foundation and navigate their collaborative venture successfully.
The agreement among the partners can either be written or oral, and it is always recommended to have a written agreement. A partnership deed is a written agreement that sets the terms and conditions that lay the foundation for working among the partners to conduct the partnership n a systematic manner.
In this article, we’ll understand:
As mentioned above, the partnership registration deed contains significant policies like the profit sharing ratio among the partners, interest on capital and drawings of partners, interest on the partner’s loan, and remuneration to be given to partners. The partnership deed is the charter document of the partnership firm. Registration of the partnership deed makes it legally enforceable, meaning it becomes legally binding on all the partners of the partnership firm entering the partnership deed. While we’re talking about partnership registration, you can register your partnership firm under the Indian Partnership Act, 1932 online on the Vakilsearch website. lets start from square one.
A partnership deed is a written document signed by two individuals entering into a business partnership, establishing formal terms and conditions. Serving as a binding agreement, the deed outlines the rights, duties, and liabilities of each partner, ensuring clarity on profit and loss sharing, individual roles within the business, and potential remuneration. Moreover, it acts as a reference point for dispute resolution among partners and grants legal eligibility for the partnership, allowing compliance with requirements like obtaining a PAN, applying for bank loans, and other legal obligations under the Partnership Act, 1932.
A partnership deed, also known as a partnership agreement, is a legally binding document signed by two or more partners joining forces to operate a profit-oriented business. Here are a list of reasons why you need a partnership deed:
The following are the provisions of the partnership deed
What if there is no partnership deed? That is when The Indian Partnership Act of 1932 comes into the picture. But, What is The Indian Partnership Act, of 1932?
The Indian Partnership Act,1932 came into effect to streamline all the partnerships in India and bring provisions that will govern the partnerships registered under the Indian Partnership Act, of 1932. It lays down regulations about registration, accounting, and so on.
Suppose you didn’t draft a partnership deed or a particular provision in the partnership and entered into a partnership firm. Still, when you go on about conducting business through this partnership, you realise certain important terms such as profit sharing ratio among the partners, interest on capital and drawings of partners, interest on partner’s loan, and remuneration to be given to partners are missing. It becomes really difficult to conduct your business as there is no proper discipline or certainty about accounting now, this is where the Indian Partnership Act,1932 comes in to play. This is what provisioning of Partnership Deed means. It is when in the absence of a partnership deed, the Indian Partnership Act,1932 will apply.
Moreover, the Indian Partnership Act,1932 also talks about the reconstitution of partnerships which comprises of :
It also prescribes the underlying process of the dissolution of a partnership firm, maintenance of the books of accounts, their inspection, and the partnership firm’s registration.
A partnership deed, alternatively termed a partnership agreement, is a legally binding contract executed by two or more individuals collaborating to run a business with the primary objective of generating profit. Here are few tips of how to govern a partnership in the absence of a Popularity deed:
If the partnership deed does not specify profit or loss sharing ratios, Section 13(b) of the Act mandates equal sharing among partners.
Absent any provision in the partnership deed, Section 13(c) states no interest shall be paid on capital.
When the partnership deed is silent, Section 13(c) prohibits charging interest on withdrawals.
In the absence of partnership deed provisions, Section 13(d) allows a maximum of 6% interest on partner loans.
If the deed lacks mention of partner remuneration, Section 13(a) prohibits any such payments.
The Indian Registration Act, 1908 mandates the registration of the partnership deed, typically on non-judicial stamp paper worth ₹200 or more, reflecting the firm’s capital. Signed by all partners, each must retain a copy. Registration occurs at the Sub-Registrar/Registrar Office in the firm’s jurisdiction, with varying stamp duty per state, as per the state’s Stamp Act. Notarisation, along with registration, validates the partnership deed legally.
Here is a sample format for the outline of a partnership deed
This deed is made on (date, month & year] between:
(Note: if there are more than two partners, their names will come in the same format, and subsequently, they will be referred to as a third partner or fourth partner, as the case may be.)
Whereas the parties hereto have agreed to start a business in partnership, and it is a legal written partnership deed that contains all the terms and conditions.
Now this partnership deed witness as under:
Provisioning helps when certain significant terms which decide the functioning of the partnership firm are missing. It helps resolve the disputes as now you have something from which you can take reference for solving your issues. It also helps in maintaining the proper books of accounts which in turn helps in making the proper financial statements which help understand the progress of the partnership firm as it depicts the profitability position of the concern and also it protects the partners from any unfairness.
For example A, B and C entered into a partnership. C advanced a loan to the firm but since there was no partnership deed between them, A and B exploited C’s position and didn’t pay him any interest. But since provisions of the partnership deed prescribe allowing 6% interest on the partner’s loan, C could easily make his stand and get his money legally.
There are no conditions as such for provisioning of partnership deed, just in the absence of the partnership deed, the provisions of the partnership deed get applicable.
So, you decide to start a partnership firm with your other partner or partners and then you proceed to draft your partnership deed. Still, you forget to incorporate certain fundamental terms in your partnership deed. Such terms might lead to future conflicts, so that is when the provisions of the Indian Partnership Act,1932 provisions apply. Then you can conduct your business smoothly without any hindrance.
To conclude, in absence of a partnership deed or certain terms in a partnership deed the provisions of the Indian Partnership Act, 1932 become applicable and govern the said partnership. It is also clear how important it is to set the term of the partnership deed with utmost precision and clarity, as a well-defined partnership deed will positively impact your partnership firm’s success. It will cost you time and money now, but it will save you a lot of time, money, and conflicts in the future. But, do not worry if you have not done a partnership deed, as the provisioning of a partnership deed as explained in this article will save you from exploitation.
A partnership signifies a collaborative effort among two or more individuals to conduct business with the aim of earning and sharing profits. Various forms exist, such as Partnership at Will, for a fixed period, for a specific venture, and Limited Liability Partnership, governed respectively by the Partnership Act of 1932 and Limited Liability Partnership Act of 2008. To ensure smooth operations, partners should register their partnership deed, fostering mutual understanding and averting future disputes.
The legal provisions of a partnership deed outline the agreement between partners regarding profit sharing, capital contributions, decision-making authority, responsibilities, and dispute resolution. It serves as a blueprint for the partnership's operation and helps avoid misunderstandings.
The main provisions of the Indian Partnership Act cover aspects such as the definition of a partnership, rights and duties of partners, rules for partnership formation, profit and loss sharing, dissolution procedures, and liabilities of partners, ensuring clarity and legal framework for business partnerships.
Provisions related to the registration of partnership include mandatory registration for partnerships with a capital contribution exceeding a specified amount, procedures for registration, submission of necessary documents, and consequences of non-registration, ensuring legal recognition and protection for the partnership entity.
When a partnership deed is silent on certain matters, the provisions of the Partnership Act of 1932 come into play, governing issues such as profit and loss sharing, decision-making processes, rights and duties of partners, and dissolution procedures, providing a legal framework for resolving ambiguities.
Four essential points in a partnership deed include details about partners' capital contributions, profit and loss sharing ratios, management responsibilities, and procedures for dispute resolution. These elements ensure clarity, alignment, and fairness in the partnership's operation and decision-making processes.
The five contents of a partnership deed typically include the name and address of the firm, names and addresses of partners, nature of business, capital contributions of partners, profit and loss sharing ratios, management responsibilities, and procedures for dispute resolution, ensuring comprehensive documentation and clarity in partnership agreements.
Also read: Can Udyam Registration be done for Partnership Firms?
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