A partnership deed is the written term of a legal document that specifies the rights, obligations, and liabilities of partners in a business partnership. It refers to an agreement between two or more individuals to run a business. A partnership deed helps to avoid potential conflicts by clarifying the terms and conditions agreed upon by both partners. This document is essential in ensuring that the business runs smoothly and legally. Without a partnership deed, disputes may arise, complicating the business.
What is Partnership Deed?
A partnership deed refers to a partnership agreement among the partners of the firm indicating terms and conditions in which the partnership between the partners is bound to operate. A partnership deed ensures there is a clear understanding of each other’s roles and duties, ensuring the smooth running of the firm’s operations.
A partnership deed is essential because It provides rules and regulations for the partnership. It holds the interests of all partners. It reduces conflicts and disputes. It gives legal recognition to the partnership.
Types of Partnership Deed
A partnership deed may vary due to the terms agreed by the parties. The following are the types of partnership deeds:
General Partnership Deed
General Partnership Deed A general partnership deed describes all partners’ roles and responsibilities, profit-sharing ratio, and liability. In this agreement, each partner would have equal rights in decision-making and liabilities concerning debts. It is one of the most common forms of partnership deeds utilized in businesses with active partners engaged in management and other operations.
Limited Partnership Deed
In A Limited Partnership Deed, the liability of at least one partner is unlimited and those other partners may have limited liability subject to their capital contribution. In the case at hand, the limited partners in this example do not participate in business management. They invest funds and share the profits. This sort of deed is appropriate for investors looking forward to using their capital without resolving how the business will be run and without risking their assets more than what they have invested.
Partnership Deed for a Specific Project
A Partnership Deed for a Specific Project is created to undertake a particular business undertaking or project. Such a partnership only exists during the lifetime of the project and automatically dissolves at the completion of the project. Such an agreement is typically used for a short-term business partnership, like construction projects, event management, or research-based projects where the partners are all working for a definitive objective.
Fixed-Term Partnership Deed
A Fixed-Term Partnership Deed is made when a partner firm will operate for a specified period that the partners agree upon; when that term ends, the partnership will automatically dissolve except if extended unanimously. This type of deed is helpful for businesses with specific periods in their operations, such as seasonal businesses or projects that have an upper limit to their lifespan.
At-Will Partnership Deed
An At-Will Partnership Deed is very flexible and continues until dissolved by the decision of the partners. Any partner can leave the partnership by giving due notice; hence, it is a good option for businesses that require flexibility in their structure. This kind of partnership deed is ideal for a company that has no predetermined period and requires continuous interaction between partners.
Registration of Partnership Deed
Each member’s rights and liabilities are documented in a document called Partnership Deed. This deed may be oral or written; however, an oral agreement is useless when the firm has to deal with tax. Some of the necessary features of a partnership deed are:
- The name of the firm.
- Nature of the business.
- Name and addresses of the partners.
- The amount of capital to be contributed by each partner.
- The drawings that each partner can make.
- The interest is to be allowed on capital and charged on drawings.
- Profit and loss sharing ratio.
- Rights of partners.
- The term or duration of the partnership.
- Duties of partners.
- Remuneration to partners.
- The method used for calculating goodwill.
Importance of Partnership Deed
There is no compulsion for the registration of a partnership deed, but it does provide the following advantages:
- Legal Recognition: A registered partnership deed gives legal identity to the business.
- Right to Sue: A registered partnership has the right to file a case in court in case of any form of dispute.
- Credibility in Banking Transactions: Banks prefer registered partnerships for loans and financial transactions.
- Protection Against Fraud: Legal registration prevents unauthorized changes in the partnership agreement.
- More Business Opportunities: More customers and suppliers believe in registered partnerships than unregistered partnerships.
Partnership Deed Contents
A partnership agreement will protect your interests in case of any dispute or misunderstanding regarding several issues that arise within the partnership. Hence, the Deed must contain all the legal formalities associated with the firm. Though there is no standard format for a Partnership Deed, we have compiled a list of the essential information that usually exists in a partnership agreement to give you an idea:
- Name of the firm as decided by all the partners.
- Name and particulars of all the partners of the firm.
- Date from which business started.
- Firm’s lifespan.
- Capital contribution of each partner.
- Profit-sharing ratio between the partners.
- Responsibilities, liabilities and authority of each partner of the firm.
- Salary and commission, if any, payable to partners.
- Process of admission or retirement of a partner.
- Goodwill calculation process.
- Procedure to be adopted when differences of opinion arise between partners.
- Procedure in case a partner becomes insolvent.
- Procedure for adjusting the books of accounts if the firm is dissolved.
Partnership Deed FAQs
1. Is a partnership deed necessary as per law?
No, the law does not compel the deed of a partnership but is always suggested so as to prevent it later on.
2. What are the minimum number of members required to enter into a partnership deed?
Under the Indian Partnership Act 1932, with two persons, only a partnership deed can be drafted.
3. Whether the partnership deed can be modified?
Yes, partners can change a partnership deed through mutual consent in the form of an amendment draft.
4. What happens if a partnership deed is not registered?
An unregistered partnership deed causes legal hurdles, and a firm cannot file a lawsuit in case of a dispute.
5. What are the crucial contents of the Partnership Deed?
The essential contents of a partnership deed include a firm name, details of partners, capital contribution, profit-sharing ratio, responsibilities, and methods of conflict resolution.
