Partnership Firm

Consequences of Not Having a Partnership Agreement

A partnership deed is a binding agreement between the partners and their duties. Read to know the importance of this document.

When a partnership is formed, a partnership deed binds those partners to their duties. It contains the objective for establishing the business and the basic norms agreed upon between the partners. At times of dispute, it acts as the go-to document for the partners. It entails various rights and obligations that each partner carries from the moment the partnership is formed. Get to know the Partnership Deed Consequences in detail.

A partnership firm is an organizational structure that involves two or more individuals operating a common business. Where two or more people are involved, it is advisable to outline such details, powers, and responsibilities on pen and paper. Although there is no restriction on a partnership deed, being oral. Written agreement very well serves the tax purposes of a firm. A partnership deed is essential to obtain a GST number.

What is a Partnership Deed?

A partnership deed is a written agreement signed and agreed upon by the firm’s partners. It clearly states all the rights and obligations they have concerning the business and the firm. The solicitor and the witnesses sign the partnership deed and all the partners. The main aim of drafting the document is to prevent any future dispute among the partners and further state the course of action if ‌a dispute arises.

A partnership deed is a vital document to the firm. It is the same as a memorandum of association is to the company. It establishes the legality of the partnership firm when partners get it registered with the registrar of the firm. 

Consequences of Not Having a Partnership Agreement

Under the Partnership Act 1932, when partners get together to manage and run a business, there should be a well-drafted partnership deed. It also provides that partners may register the firm with the registrar of firms of the state in which the firm’s workplace is situated. Here are various consequences that partners may have to face if and when they fail to have a written partnership deed. 

Profit Distribution of Businesses

The firm combines various partners involved in the partnership firm running a business or a profession. They apportion the profits according to the pre-defined ratio among the partners. But where is this ratio written? They decide the profit-sharing proportion with the consent of all the partners and distribute the firm’s profits to the same ratio. 

A partnership deed mentions such provisions. Following section 24 of the partnership act, if the partnership does not specify any ratio, it has to be divided equally among all the partners. When a partner starts a dispute regarding the PSR ratio being unfair, the deed is the only document that proves the consent of such a partner. It acts as a legal document signed by the partner.

Dissolution and Retirement

Under the Partnership Act, any one partner may dissolve the entire partnership. We can do it by giving notice to the other partners. At the time of dissolution, the business stops, and all trading comes to a halt. They sell the assets, pay liabilities off, and return surplus cash to the remaining partners. A dissolution of partnership deed format is a complex process, and therefore, partners should establish definite rules and guidelines before furtherance of any retirement, reconstruction, or dissolution.

Similarly, during the retirement of a partner, other remaining partners get all the profits after separation. It is where partnership plays its role. In the pre-decided route for dissolution, partners agree to the rules, and they write them in the deed. It avoids any chances of disputes or disagreements between the partners.

GST Registration

If we look at the process of registration of a firm for a GST status, one document that is compulsory for the process, along with PAN, Aadhar, and other partners’ documents, is the partnership deed. 

Before diving into the importance of partnership firms having a GST number, let us understand GST. GST’s full form is Goods and Services Tax. It is a destination-based tax that has dissolved all the other indirect taxes. Every form of person has to get registration if its turnover reaches over and above a specified limit. This limit for partnership firms is 40 Lakh in the year. Firms also take voluntary registrations because of the benefit it gains with enhanced business and satisfied suppliers. Certain firms are to be compulsorily registered, and an example of this is an eCommerce firm.  

We carry out the GST payments and returns through GST login and the respective accounts. The GST portal enables the registration of new applicants. The portal specifies that registration of the firms requires the PAN card of the firm and its registered partnership deed. So, without the document, partners cannot have a New GST registration.

Inability to File Legal Proceedings Against the Third Party

Any person may start legal proceedings against the other and plead with the court. But there is a restriction for partnership firms that are not registered or have no partnership deed. This limitation is based on the principle that when the partnership firm is unregistered, it is not a legal person in the eye of the law. 

Firms can get their partnership deed registered only when they have drafted one. So when a clash arises between the partners and the outsiders, partners cannot file any case against such a third party. Therefore, it is always advisable to draw up a partnership deed and register it with the registrar. 

Bottom line

The partnership deed is the primary document that adds to the firm’s existence and the relationship between the partners. Without it, partners are just people who are running a business. 

Documentation is an essential aspect of each level of business, and the same goes for firms. The principal documentation in a partnership firm is the partnership deed. The deed overrules the interest of single partners and promotes the mutual interest of all the partners. It makes the firm grow and gives direction to the partners. Not only financially but mutually as well. If you want to know more about the partnership and the various other provisions, it is better to contact the experts at Vakilsearch and get your queries cleared.

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