Partnerships are as old as businesses. However, there existed very little legal coverage of the risks involved till new laws were formulated only a few hundred years ago.
There are various legal formalities involved when two or more people enter into a partnership. The most basic and common formality is a partnership deed. The agreements between the partners, the duties which are distributed between them and the sharing of profits or losses are all mentioned in such a deed.
In this article, we shall look at what such a deed covers and how it is bought to being.
A partnership deed or agreement is a detailed and legal charter which dictates all the rights and functionalities of the partners in a business venture.
The following aspects are common to every partnership deed.
The deed comes to life when there is an agreement on all legal matters between the partners. Disagreements may result in a ‘no-deed’ scenario.
This agreement can be in two different forms - oral or written. However, for legal reasons and statutes, it is better to have a written partnership agreement.
All such deeds/agreements come under the aegis of The Indian Partnership Act, 1932. The Act itself does not stipulate that the deed has to be written in nature. If it is written, however, it is termed a ‘Partnership Deed.’
Such a deed covers the various existing and foreseeable characteristics which impact the partners. For instance, the elements of profit and risk sharing, the management of day-to-day business, the distribution of profits, the roles in decision-making and other essential points are all covered in this deed.
There are various types of partnership deeds, not to mention different types of partnerships
A deed can be modified at any time given the affirmation of all the partners involved. A new deed has to be drafted and signed by all the partners under the aegis of the Stamp Act and a fresh deed must be drawn up. To legally validate it further, the deed must be registered with the Registrar of Firms.
Since such a deed carries the weight of law, registering this agreement comes first and has paramount importance. There are certain details which are required when the registration process is initiated. The details are the following.
The name of the firm. It must be different from any existing firm for legal reasons.
The details of each partner, including his/her association in any other business.
The nature and type of the business.
The total planned duration for which the partnership is likely to run.
Total amount contributed as capital by each partner must be mentioned.
How much of the capital each partner can draw at a tie should be mentioned clearly.
If such drawings attract any interest, that too must be mentioned.
The rights and duties of each of the partners have to be mentioned in detail.
Should any partner be receiving any remuneration, there must be a mention of that as well.
Lastly, the method of sharing profit and loss should be defined well and unambiguously.
Any general partnership deed or agreement must necessarily contain the following information.
The partnership firm that thus comes up should be mentioned, besides the full details of the partners whether sleeping or active. The name should be mentioned without using extra details like “company”, ”private company”, “proprietorship”.
The nature of the business should be mentioned, besides details on where the business premises are located. The origin date, or the date from when the business starts functioning, must be mentioned clearly.
If there are any branches, they should be detailed too.
If possible, the partnership’s duration must be mentioned. This cannot be stated in advance at all times; hence, an approximation has to do.
Each partner’s contribution to the business, his or her remuneration, salary (if applicable) and profit sharing ratio (if applicable) must be detailed.
The deed must detail if there are terms on whether partners can be suspended, any plans on whether a partner can retire or his terms may superannuate, and whether there are provisions on the expulsion of a partner.
Internal and legal audits are important to ensure that a firm is running fairly. The provisions for such audits must be detailed.
A legally accurate and well-drafted deed has the following benefits.
It lists down the functions, liabilities, responsibilities and other aspects of a partner in any firm. In future legal disputes, the terms listed in the deed are final and there are no chances of deviation. This saves later litigation.
There exists no confusion on the profit or loss sharing between the partners in question.
The deed covers every aspect of remuneration, salary or any extra benefit which might be payable to each partner. While these sums may change later, the deed is the final legal document for any future dispute.
In short, a partnership deed or agreement is essential for a business to run fairly and profitably.
The information provided above by Vedantu offers an insight above anything and everything about partnership deed. To check for more topics related to commerce or any other subject, make sure to browse through our website.
1. How to Prepare a Partnership Deed?
Such a deed is prepared in the presence of partners as mandated by company lawyers. The deed is then registered under The Indian Partnership Act, 1932.
2. What Do You mean by a Partnership Deed?
A partnership deed is a legal charter detailing all the aspects of the partners in a business and includes their duties and liabilities among other details. The deed can be either oral or written.
3. What are the Types of Partnership Deeds?
There are 3 Broad Types : General Partnership, Limited Partnership and Limited Liability Partnership.