Read this blog to know about the partnership between three partners, the partnership agreement/ deed, and other relevant information.
A business agreement between two or more persons is known as a partnership. A formal agreement is made between the partners to seal the venture. The partners agree to share their resources and expertise to achieve an objective/ together. Since the partnership is a separate body, it cannot be teamed with any other ventures of the partners. Each partner is equally responsible for the costs, losses and profits incurred by the business. Business companies opt for similar partnerships to leverage resources, save costs, and utilize combined expertise. In India, a partnership is formed/registered following the provisions of the Partnership Act, of 1932. This article will help you know about the partnership between three partners and the legal formalities they must complete in order to start a business.
Partnership Agreement – Elements
The elements of a partnership agreement are as follows:
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Lawful business
All professions, trades, and occupations come under the umbrella of business. A partnership agreement is made to carry out a business within the limits of the law.
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Name of the business
Since the partnership firm is a separate entity, it must have its own name. It cannot be teamed with another venture.
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Association of persons
At least two persons are required to form a partnership.
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Relationship of the partners
The relationship between the partners is totally contractual in nature and arises out of a desire to make profits.
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Mutual trust and confidence
A partnership’s smooth and successful working depends on the mutual trust and confidence of the co-owners of the business.
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Restrictions on share transfer
In a partnership, a partner cannot transfer his/her shares without the consent of all other partners.
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Unlimited liability
A partnership agreement requires unlimited liability. If the need arises, the personal properties of the partners can be attached if the firm is unable to meet the claims of the creditors.
What is a Partnership Deed?
A partnership deed is a legal document signed by two or more individuals who have come together with mutual consent to run a new venture/business together. It is registered under the Partnership Act, 1932. The deed ascertains that the concerned parties do not disagree or go into a dispute over the partnership norms. Before signing the deed, the partners can make changes to the terms prescribed in the format with mutual consent.
Requirement for a Partnership Deed
A partnership deed is important because:
- It mentions the rights, responsibilities/ duties, and liabilities of each partner
- Includes the terms and conditions of the partnership business. This minimizes the chances of misunderstanding
- In case of any dispute arising, the deed can be referred to, and the disputes are resolved easily
- The confusion regarding the compensation of profits and loss sharing of each partner can easily be dealt with
- Since the responsibilities and duties of each partner are mentioned clearly, there is no possibility of a blame game
- The deed also contains clauses that make it clear regarding payments of remuneration
- Registration of a partnership makes the firm eligible to obtain PAN, open a bank account in the firm’s name, apply for a bank loan, obtain GST registration/ IE Code/ FSSAI license in the name of the partnership firm
- It safeguards the interests of all the partners.
Executing Partnership Deed
A partnership agreement should be printed/typed on non-judicial stamp paper. The value of the stamp paper should be ₹100 or higher according to the properties belonging to the partnership firm. Partnership agreements should be signed in the presence of all partners. Each partner should receive a signed original for their record. After all, the partners finish signing the document, and it is witnessed. Each of the partners keeps the signed partnership deed in duplicate or triplicate.
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Components of Partnership Deed
Before registering the partnership deed, the partners should make a Partnership agreement template. The template should include the following:
- Name of all partners
- Addresses of all partners
- Establishment date of the firm registration online
- Capital contribution by each partner
- Guidelines for the operations
- Profit and loss sharing ratio of the partners
- Rights and duties
- The interest rate on borrowed capital/loan
- Rules for dispute settlement
- Rules for admission, retirement, or death of a partner
- Code of conduct of the business
Features of Partnership Business
- A partnership business/firm should have minimum 2 partners
- In a banking business partnership – the maximum Member can be 10
- In the case of a non-banking business partnership – the maximum partner limit is 20
- Partnerships do not need any fixed capital requirement to start a business. They can start the lawful business in partnership with as much capital as the members prefer
- There must be a mutual understanding among the partners before starting a business
- The profit and loss ratio should be decided before signing the deed
- Every member or partner of the firm is equally responsible for the action of other partners
- An auditor is not mandatory when registering a partnership firm.
Documents Required
- To register under the Partnership Act, Form No. 1 will be needed
- An original copy of the Partnership Deed with each partner’s signature
- Affidavit that declares the individual interests of partners
- Lease or rental agreement of the property.
In India, all partnership firms are registered under the Indian Partnership Act, of 1932. After the registration of a partnership firm, the partners should sign and date the Partnership deed. The signed document then should be witnessed by an adult who is neither one of the partners nor in any way related to any partner. Each partner of the firm must keep a copy of the partnership deed in his custody as the deed defines the responsibilities and role of each partner in the partnership. The deed helps in avoiding needless misunderstandings, disputes, or harassment between the partners.
Conclusion
We hope this article has helped you know about the partnership between three partners. Partnership firms have their advantages and disadvantages too. When individuals enter into a partnership agreement with mutual consent, their expertise, efficient and motivated workforce, goodwill, and resources, when put together, give excellent results. The profits pour in, and the business surges ahead. If managed efficiently, such ventures result in Increased productivity and profit. There are significant disadvantages of a partnership relating to liabilities in the partnership business, and strong possibilities of conflicts and disputes remain.
Visit VakilSearch to get professional help in registering your business and satisfy all your queries regarding partnership ventures.
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