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Partnership Deed

What is a partnership?

Sole proprietorships have disadvantages such as restricted capital and less access to resources. To deal with these problems, people come together and develop partnerships. Partnerships enable partners to pool their resources and grow their businesses.

In India, partnership business is governed under the Indian Partnership Act, 1932. Section 4 of the partnership Actdefines a partnership as a relationship between partners who have agreed to share the firm's earnings and is carried on by all or any of them acting for all. Furthermore, the firm's business must be conducted either by all of them working together or by one person acting on behalf of others. The participants of such a business are referred to as partners individually and as a firm collectively.

A partnership is a type of business in which two or more people form a legal agreement. They agree to be co-owners, share the responsibility of running a business, and share the profits generated or losses suffered by the business.These partnership features are documented in a document called the partnership deed. There are three most common types of partnerships:

1. General Partnership

Each partner in a general partnership shares equally in the workload, liability, and earnings created and distributed to the partners. All partners are actively involved in the day-to-day operations of the company.

2. Limited Partnership

Limited partnerships enable outside investors to invest in a company while retaining limited liability and influence based on their contributions. It is a more intricate type of partnership with more ownership and decision-making freedom.

3. Collaboration or Joint Venture

Joint ventures are often formed for short-term initiatives or partnerships that bring together numerous partners for a project.

What is a Partnership Deed?

A partnership deed is a written agreement among the partners of a firm that includes all the terms and conditions related to the partnership. A partnership deed's objective is to create a clear knowledge of each partner's position, ensuring that the firm's operations function smoothly.

Partnership Deed

The partnership is revealed when

There is an outcome of agreement among the partners, which must be written or oral. The Partnership Act makes no requirement for the agreement to be in written form. The document containing the terms and conditions of the written agreement is referred to as the 'Partnership Deed.' It usually includes information about all of the factors influencing the partners' relationship, such as the purpose of the trade, each partner's capital contribution, the ratio in which the partners' gains and losses will be divided, and the partners' privileges and entitlements to interest on the loan, interest on capital, and so on.

Important Considerations When Drafting a Partnership Agreement:

1. Number of Members

There are at least two members required to form a partnership. Previously, the number of partners was limited as follows:

  1. Banking - less than or equal to 10
  2. non-banking business - less than or equal to 20 employees

It is prohibited to continue the partnership's operations if there are more partners than those listed above.

2. Minimum capital requirement

The amount of capital required to start a business is unrestricted and partners can begin the business with as little funding as they like. The amount of capital invested by partners is also taken into account when calculating stamp duty.

3. The name should be unique

When selecting a name for the company, the partners should be careful that it does not imply any negative purpose and that it was straightforward to remember.

Registration of Partnership Deed

As stated above, partnership deed contains rights and responsibilities of each member of the firm. This agreement can be oral or written; nevertheless, an oral agreement is useless when dealing with taxes. A partnership deed must include the following features:

  • The company's name.
  • The partners' names and addresses.
  • The nature of the company.
  • The partnership's tenure or longevity.
  • The amount of capital that is contributed by each partner.
  • The drawings that each partner is capable of producing.
  • The amount of interest that will be allowed on capital
  • The procedure for calculating goodwill
  • The ratio of profit and loss sharing

Contents of a Partnership Agreement

All of the terms and legal elements of the partnership are covered while creating a partnership deed. This deed also offers basic recommendations for future projects and can be utilized as proof in the event of a conflict or legal proceedings. Any general partnership deed or agreement should include the following information.

Partnership Deed
  • The firm's name, as decided by all partners.
  • The names and contact information for all of the firm's partners.
  • The start date of the company.
  • The duration of the firm's existence.
  • The amount of capital each partner has invested.
  • Profit sharing ratio among partners.
  • Each firm's partner's duties, obligations, and power.
  • The salary and, if appropriate, commission paid to partners.
  • The procedure of admitting or retiring a partner.
  • The procedure for calculating goodwill.
  • The method to be followed in the event of a disagreement between partners.
  • Procedure for when one of the partners becomes insolvent.
  • Account settlement procedure in the event of a firm's dissolution.

The significance of a partnership agreement

A few significant benefits of a well-drafted deed are as follows:

  • It controls and monitors all partners' rights, obligations, and liabilities.
  • Prevents disagreements between partners.
  • Prevents uncertainty about the profit and loss distribution ratio among the partners.
  • Clearly states each partner's responsibilities.
  • The partnership agreement specifies the partners' and working partners' remuneration or salary. However, each partner who has invested capital in the business receives interest.

Documents Needed for a Partnership Agreement

The use of any specific papers is not required for drafting and executingthe Partnership Deed. However, the partners' IDs should be scrutinizedto authenticate the names and permanent address of the partners. Documents stating clear title to the properties/businessesmust also be checked. The partners must be trustworthyand all documentation necessary for a complete background check on each partner must be scrutinized. Genuine documentation about the partners' shares may also be required.

Partnership Deed Legal Considerations

In India, partnerships are registered and controlled under the Partnership Act of 1932. The Partnership Deed created by and between the partners must be duly stamped, as per the Indian Stamp Act. Each partner should keep a copy of the partnership agreement. If the firm is a registered firm, then a copy of the partnership deed must be filed with the registrar. Although it is not required to register a partnership firm, it is strongly advised to do so due to the numerous benefits that registration provides.

How can a lawyer assist in the creation of a Partnership Deed?

One of the first and most significant measures you must take is to employ a professional documentation lawyer who should be familiar with the legal procedures and requirements involved in writing a Partnership Deed. A lawyer would design a Partnership Deed since they have the legal understanding and experience to handle and draft such documents. They will advise and draft the agreement based on your specific case, including the facts, conditions, and requirements. A lawyer who specializes in documentation is familiar with proper drafting techniques and the provisions that must be included in your agreement or contracts.So, the partners should hire a qualified lawyer only to create such critical legal documents so that the firm can enjoy the maximum benefits of the deed.

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