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.
What is a Partnership Deed?
A Partnership Deed or agreement is a detailed Legal charter that dictates all the rights and functionalities of the partners in a Business venture.
What are the Aspects of a Partnership Deed?
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 the 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
Modifying a Partnership Deed
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.
Registering a Partnership Deed
Since such a Deed carries the weight of law, registering this agreement comes first and has paramount importance. There are certain details that are required when the registration process is initiated.
The details are the following:
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The name of the firm. It must be different from any existing firm for Legal reasons.
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The details of each partner, including his/her association in any other Business.
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The nature and type of the Business.
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The total planned duration for which the Partnership is likely to run.
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The total amount contributed as capital by each partner must be mentioned.
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How much of the capital each partner can draw at a tie should be mentioned clearly.
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If such drawings attract any interest, that too must be mentioned.
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The rights and duties of each of the partners have to be mentioned in detail.
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Should any partner be receiving any remuneration, there must be a mention of that as well.
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Lastly, the method of sharing profit and loss should be defined well and unambiguously.
What Does a Partnership Deed Contain?
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.
Why is a Partnership Deed Vital?
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 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.
You might have heard people saying that someone has started a Business by partnering with another person. Do you know what is the procedure for starting a Business or a firm in Partnership? All the partners have some responsibilities which they have to take seriously. They will need to prepare a Partnership Deed to start a Business. In this article, we are going to tell you about the Partnership Deed and what it means. You will also get to know the importance of a Partnership Deed, how to draft a Partnership Deed, etc.
The chapter of ‘Partnership’ is an important chapter of the CBSE Class 12 Accountancy as well. Every year, a lot of questions are asked from the topics related to the Partnership. So, students need to prepare this topic very helpful as this article will help them in understanding all the concepts very easily.
A limited Partnership is a document that spells out the terms and conditions of a Partnership between two or more people. One of the most common types of organizations for beginning a new Business is a Partnership firm.
The seamless and successful running of a Partnership firm demands a good understanding of the several policies that regulate their cooperation among its members and this is the reason, you need a Partnership Deed. To help the partners, it clarifies language such as salary, draws, new partner admission, profit/loss sharing, interest on capital, and so on.
Though it is not required, it is always preferable to enter into a Partnership Deed to eliminate any potential conflicts or litigation among the partners. Two or more persons can come to an agreement and all of them should stamp and sign the document.
The Following Characteristics Must be Present in A Partnership Deed:
The firm’s name; the partners’ names and addresses; The nature of the company; The Partnership’s tenure or longevity; The amount of capital that each partner will contribute; The drawings that each pair is capable of producing; The amount of interest that can be charged on capital and drawings; Partners’ rights; partners’ responsibilities; partners’ remuneration The procedure for determining goodwill; Ratio of profit and loss sharing; Executing a Partnership Deed
Establishing a Partnership Deed
As per the value of the Partnership firm’s properties, a Partnership Deed must be printed on Non-Judicial Stamp Paper with a value of Rs.100/- or more. Every partner keeps one original sign for their records, and the Partnership agreement is typically signed in the presence of all partners. After the Partners have signed the paper, it is attested, and the signed Partnership Deed is kept.
Major Benefits of Partnership Deed
A proper Deed establishes Legal obligations amongst the firm’s partners. It is not, however, required to be registered. This means that you will also be able to operate an unregistered Partnership firm.
The following are some examples that will help you to know the importance of a Partnership Deed:
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It specifies who is responsible for what as this means that the roles of each partner are outlined.
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Because all of the terms and conditions of the Partnership have been written out in advance in the Deed, it helps to avoid any misunderstanding between the partners.
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Any disagreement between the partners can be easily resolved by referring to the Partnership agreement.
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It establishes each partner’s rights, responsibilities, and obligations.
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A Partnership Deed might also include sections that define what partners should be paid in terms of pay (salary). Working partners are typically compensated. However, interest is paid to all partners who have contributed capital to the company.