What is a Partnership Deed?

When two or more persons come together or joins hands in order to set up a business in view of equally distributed profits and losses it is called partnership and as per Section 4 of the Indian Partnership Act 1932, a partnership is basically a relation between the involved parties who have joined hands and have agreed to share the profits of a business carried on by all or any of them on behalf of all and where the partners enter into partnership individually, collectively they are called as firm and essential features of a partnership are as below:

Format of Partnership Deed
  1. Two or more persons: For a partnership to form there should be at least two people working towards same goal. Indian Partnership Act, 1932 has put no limitations on maximum number of partners in a partnership firm, Indian Companies Act has put the restriction on the same depending on the type of firm. For example, for a business other than banking, maximum number of partners cannot exceed 20 and for banking firms or business, the maximum number of partners should not exceed 10 and if the number of partners exceeds the limits then the partnership becomes illegal and invalid.
  2. Business: For a partnership to form there has to be some business because mere co-ownership of property does not form a partnership. Also the business has to be legal in nature for it to be valid; an illegal business is not valid and cannot be registered.
  3. Mutual agency: A partnership works in mutual agreement of the involved parties’ i.e. either the business of a partnership may be carried on by all the partners or by one acting for all, however irrespective of the case, it has to be mutually agreed by all.
  4. Agreement: A partnership is nothing other than an agreement between the involved parties who have decided to come together to do the business and to share profit and loss, whatever the case may be and to give legal binding to the relationship, partnership deed or agreement is documented.
  5. Sharing of profit and loss: Ground or basis for coming into a partnership is to agree to share the profit or loss of business because a partnership is not for the purpose for some charitable activity.
  6. Liability of partnership: Usually every partner is equally liable with all the other partners and liability of partners is not limited i.e. it ranges from paying of the firms debts, his private assets etc can also be used if required,

A partnership deep, also called as a partnership agreement is a legal document that outlines and defines roles and responsibilities of all concerned parties involved in a business operation. The reason why the roles, responsibilities and liabilities are listed and documented well before the operations start is to avoid unnecessary misunderstandings, harassments, tension and unpleasant situations amongst the parties involved in the event of any dispute. Apart from avoiding unpleasant situations, a partnership deed plays a vital role in building trust and mutual understanding because everyone is aware of do’s and don’ts and the probable repercussions.

According to the Partnerships Act 1890, a partnership comes into existence when multiple parties come together to carry business operations in view of profit and it is an unsaid rule and fact to have a partnership deed in place before looking into other matters because although involved parties are aware of their role and responsibilities, it is only enforceable if its written and duly signed by all the parties which in a way means having consent on the content of the partnership deed. A partnership deed is not a public document as it is the case with the Memorandum of Association of a company.

There is more than one reason to have a partnership deed in place and few of them are as mentioned below:

  • Clarification regarding the nature of the partnership: A partnership deed gives a clear picture regarding the nature of the partnership.
  • Assignment of duties: It goes without saying that at times during the course of a business operation; one partner might take a decision to which other partners don’t approve and thus having a partnership deed in place will put limits as in will specify the partners who have authority to make certain decisions.
  • Avoiding unwanted dissolution: In the absence of a partnership deed, anyone can dissolve the partnership at any point of time without any prior information or valid reason for that matter.
  • Removing partners: Having a partnership deed in place restricts your wish to remove your partner(s) in case things go south because usually as per the partnership deed, no majority of partners can expel anyone without having clauses and terms and conditions in place.
  • Limit your liability: It is important to have partnership deed ready because firstly it will distribute the liabilities equally and secondly it allows you to outline everyone’s level of liability which is directly proportional to the amount of investment everyone has done and as an unsaid rule, higher the investment, higher the liability.
  • Profit sharing: Usually the profit generated from the operations is shared equally amongst the partners however in case of an unequal profit distribution; partnership deeds come more than handy in case of a doubt or dispute.
  • Avoiding legal proceedings: Every partnership deed caters for resolution methods such as arbitration and mediation in case of a dispute and thus saves you from spending your hard earned money on the costly legal proceedings.

Contents of a partnership deed

It is always better if the partnership deed is very elaborate and clear about all possible questions and situations which may arise in the due course of partnership. Normally a partnership deed must have below mentioned contents:

  • Name of the firm: A partnership deed holds no value without having name of the firm on it because it is the name by which the firm is known in the market and thus forms a mandatory and indispensable part of a partnership deed.
  • Details of the partners: Any partnership deed will have minimum two partners and irrespective of the number of partners involved, a partnership deed must have details such as name, contact details i.e. phone number and email id, complete postal address both residential and correspondence and their bank account details.
  • Nature of business: A partnership deed specifies the nature of the business in a clear manner to avoid any kind of ambiguity in case of a dispute.
  • Term or duration of partnership: Normally there is no such defined timeline for a partnership but in case the partners are clear about the duration they have come together, it is important to mention the duration in the partnership deed.
  • Amount of investment contributed by each partner: This section forms most important part of any partnership deed because it is this section which defines the liabilities of the partners and their decision making rights. Also, to avoid any confusion and to give a clear picture to the parties involved, it is important to pen down the investment made by everyone.
  • Rights of partners: In 90% of the cases, the dispute is regarding either the ambiguity in rights as in who is authorized to do what and unless it is written and documented, there is no way it can be resolved so to avoid any unpleasant situation and harassment, it is mandatory to jot down the rights of each partner involved in the partnership.
  • Duties of partners: With rights come duties or roles and responsibilities and a written legal document i.e. the partnership deed defines duties of every partner so that there is no interference in each other’s sphere.
  • Remuneration to partners: A partnership happens in view of profit and thus it is mandatory to list down the remuneration of the partners because if and when a partnership has been dissolved, 99% of the times it has happened because of this very reason i.e. difference in what was expected and what was received.
  • Settlement of amount on the dissolution of the firm: A partnership deed also helps in resolving disputes and thus lists down various methods such as arbitration and mediation rather than taking legal route every time there is a dispute. However one must ensure to list down all possible resolution methods.
  • Retirement/termination clause: A partnership deed documents the conditions that need to be fulfilled in case of termination of a partner or his retirement age and the probable consequences.

Execution of a partnership deed

In India a partnership deed or agreement should be printed on a non-judicial stamp paper with a value of Rs 100 or more depending on the total value of the properties involved in the partnership firm. A partnership deed is signed in the presence of all the partners and everyone will have his/her copy of the partnership deed in original for his/her own records. Also the partnership deed is witnessed.

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