Sun. Dec 4th, 2022

Partnership Deed: Meaning, Benefits, and Importance

A partnership deed is a written legal agreement signed by two people who come together to run a business or enterprise, despite the profits or losses incurred. Thanks to Indian law, Indian entrepreneurs are provided with several options when they start a business. Among the many benefits provided by law, a partnership firm is something many entrepreneurs can enjoy.

         Partnership business has several benefits when planned wisely. one gains expertise in different fields and can divide the work conveniently among themselves. Better expertise and intelligence make one of the strongest businesses and enhance the image and credibility of the enterprise.

         However, partnership businesses involve a lot of risks and effective planning and execution. Several adverse situations might arise, like conflicts regarding money and ideas, disagreements, and other internal conflicts that might result in fallouts. Therefore, before one dives into their joint venture where they invest all of their savings and efforts, they should sign a partnership deed. This legal practice will help to safeguard the interests of both parties involved in the enterprise.

Meaning of a Partnership Deed

As mentioned earlier, a partnership is a legal document that two individuals sign when they come together to run a business, in order to safeguard each of their interests in the enterprise. In this legal document, all the essential terms and conditions of the business are mentioned, like the sharing of profits and losses, various obligations, admissions of new partners if necessary, rules and regulations to be followed, salaries, the process of exit, amidst others. The partnership agreement serves as a vital legal document in case of fallouts or disagreement between the partners, or in case they end up in court. This document is registered under the Indian Registration Act of 1908, therefore there is no risk of the partnership deed getting destroyed while in possession of the business partners.

Essential Contents of a Partnership Deed

There is no specific standard format for drafting a partnership deed. It depends on the individual what clauses and details they will include in the document with respect to their firm so that their interests are safeguarded during any fallout of confusion between the partners. Here is a list of details that are mostly incorporated in partnership deeds:

  • The name of the firm and details of the partners is mandatory. These details will explain the purpose of the partnership and the type of business that they have undertaken.
  • The principal location of the firm, and the place from which the business will operate from time to time as determined by the partners
  • The duration of the partnership, date of the firm’s establishment, and the period till which the deal will last
  • The contribution of capital is an essential detail that the deed must incorporate. It should include the capital of the firm, cash, property, goods, services, in the value agreed upon.
  • Withdrawals of capital and the details of the drawing policy that is permitted to each partner, and if there are interests to be paid during such withdrawals
  • Salary and commission of the partners and the ratio or percentage that each will receive.
  • The ratio of profits or losses incurred that would be borne by the partners
  • Regulations to be followed and other details of accounts and how they will be settled in case the firm is dissolved.
  • Rules and regulations or clauses for the appointment of a new partner if and when necessary.
  • Rules and regulations in case one or both of the partners go bankrupt.
  • The financial year of the partnership
  • Roles, responsibilities, and duties of each partner in the firm.
  • The management of accounts, the firm’s transactions, and handling of account books of the firm should be decided upon, and every partner will have the right to access it at any time.
  • Rules and regulations to be followed in case a partner decides to withdraw at any given time.
  • Clauses for borrowings and loans from banks, and banking and partnership funds.

Advantages and Importance of Partnership deeds

A proper, well-drafted partnership deed ensures the legal responsibility between the partners of a business. Although it is not mandatory and can exist in the oral format as well, it is important to have it written. The oral format of partnership deeds can have many drawbacks, for example, it will hold no value when it comes to tax purposes, and in case there arises any dispute between partners, there will be no legal document available. Here we have enumerated some advantages of a written partnership deed:

  • It outlines the rights, duties, and liabilities of each partner
  • It can help avoid misunderstandings between partners because all the terms and conditions are already mentioned in the document and already agreed upon
  • It also helps partners to file a lawsuit in court in case any dispute arises
  • The profit and loss ratios, salary, etc. is mentioned beforehand to avoid any misunderstanding or confusion
  • If any dispute or confusion arises between partners, it can be settled easily taking the rules, regulations, and reservations made in the deed
  • It mentions the rules for withdrawals, and the interest to be paid, and thus avoids any confusion that might arise.

Risks of not having a Written Partnership Deed

Oftentimes, partnership deeds can be oral and one need not have a written deed. It is not mandatory to be registered, therefore one can run an unregistered partnership too. Here are some risks that might be faced:

  • No claims can be enforced before a third party court of law
  • There is no legal document to file a lawsuit against partners
  • No lawsuit can be filed by the partners of an unregistered business to enforce the right against the firm
  • Several confusions can arise due to the details not being mentioned in a written format. There are higher chances of disputes between partners due to the same reason.
  • An oral partnership won’t hold any value when cases of tax purposes arise.
  • Confusion about the rights and duties of the partners might arise, thus fuelling more disputes.

For the same reasons, it is always better to have a well-drafted partnership deed signed and agreed upon by both partners to settle differences and disputes and help in the smoother running of the enterprise.