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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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:
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:
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.