This blog privides indights on the critical provisions within a Partnership Deed, covering aspects such as capital contribution, profit distribution, management roles, dispute resolution, and more. Understanding these elements is crucial for partners to establish a solid foundation and navigate their collaborative venture successfully.
Introduction
The agreement among the partners can either be written or oral, and it is always recommended to have a written agreement. A partnership deed is a written agreement that sets the terms and conditions that lay the foundation for working among the partners to conduct the partnership n a systematic manner.
In this article, we’ll understand:
- What is the provisioning of a partnership deed?
- How does the provisioning of partnership deed work.
- What are the conditions for provisioning of partnership deed?
- How vital is provisioning?
- What is the process of provisioning a partnership deed?
As mentioned above, the partnership registration deed contains significant policies like the profit sharing ratio among the partners, interest on capital and drawings of partners, interest on the partner’s loan, and remuneration to be given to partners. The partnership deed is the charter document of the partnership firm. Registration of the partnership deed makes it legally enforceable, meaning it becomes legally binding on all the partners of the partnership firm entering the partnership deed. While we’re talking about partnership registration, you can register your partnership firm under the Indian Partnership Act, 1932 online on the Vakilsearch website. lets start from square one.
What is a Partnership Deed?
A partnership deed is a written document signed by two individuals entering into a business partnership, establishing formal terms and conditions. Serving as a binding agreement, the deed outlines the rights, duties, and liabilities of each partner, ensuring clarity on profit and loss sharing, individual roles within the business, and potential remuneration. Moreover, it acts as a reference point for dispute resolution among partners and grants legal eligibility for the partnership, allowing compliance with requirements like obtaining a PAN, applying for bank loans, and other legal obligations under the Partnership Act, 1932.
Importance of a Partnership Deed
A partnership deed, also known as a partnership agreement, is a legally binding document signed by two or more partners joining forces to operate a profit-oriented business. Here are a list of reasons why you need a partnership deed:
- Partners define relationship terms through the deed
- It regulates business nature, liabilities, and partners’ rights and duties
- Specifies all partnership terms to prevent misunderstandings
- Disputes resolved according to deed terms
- Clarifies profit and loss sharing ratios
- Defines roles of individual partners
- Stipulates partner remuneration to avoid disputes
- Documents terms for smooth firm operation.
What Does a Partnership Deed Contain
The following are the provisions of the partnership deed
- The name of the firm
- Nature and location of the business
- Name, addresses, and other information of the partners
- The amount of the capital to be contributed by each of the partners and interest of the capital, if any
- The profit-sharing ratio of partners
- The number of drawings, if any, and interest on drawings
- The amount of salary or commission allowed to partners
- Interest on loan given by the partners to the firm
- Method of valuation of goodwill
- Type of partners
- Admissions and retirement procedure of a partner
- Accounting procedure and audit of the firm
- Signatories to operate the bank account of the firm
- All the partners agree upon other terms and conditions.
What if there is no partnership deed? That is when The Indian Partnership Act of 1932 comes into the picture. But, What is The Indian Partnership Act, of 1932?
The Indian Partnership Act,1932
The Indian Partnership Act,1932 came into effect to streamline all the partnerships in India and bring provisions that will govern the partnerships registered under the Indian Partnership Act, of 1932. It lays down regulations about registration, accounting, and so on.
You might be wondering how it answers your question, which is-
What Is the Provisioning of a Partnership Deed?
Suppose you didn’t draft a partnership deed or a particular provision in the partnership and entered into a partnership firm. Still, when you go on about conducting business through this partnership, you realise certain important terms such as profit sharing ratio among the partners, interest on capital and drawings of partners, interest on partner’s loan, and remuneration to be given to partners are missing. It becomes really difficult to conduct your business as there is no proper discipline or certainty about accounting now, this is where the Indian Partnership Act,1932 comes in to play. This is what provisioning of Partnership Deed means. It is when in the absence of a partnership deed, the Indian Partnership Act,1932 will apply.
Provisions of the Indian Partnership Act,1932
- Profit-Sharing Ratio: If there is no specific profit sharing ratio is mentioned, partners will share the profits and losses equally or in the same ratio even if they contribute capital in different amounts
- Participation in affairs of the firm: Every partner, irrespective of its type, has the right to participate in the business’s conduct and access the books of accounts and other relevant documents
- Interest on Capital: In the absence of the partnership deed, No partner is entitled to interest on their capital
- Loan on Partner’s Loan: If the partners have given any loan to the firm and no provision as to the interest rate as laid down in the partnership deed, then that partner is allowed to receive interest on the loan advanced by him at the rate of 6% p.a
- Interest on Drawings: Like no interest is charged on the partner’s capital, there is no interest to be charged on drawings
- Salary to partner: If a partner who is a working partner and no provision as to his remuneration is made in the partnership deed then it is a right thing that they do enter into a partnership deed and set the terms of salary straight and clear because the Indian Partnership Act,1932 is silent too about the salaries to be given to the partner.
Moreover, the Indian Partnership Act,1932 also talks about the reconstitution of partnerships which comprises of :
- Admission of a partner
- Retirement of a partner
- Death of a partner
It also prescribes the underlying process of the dissolution of a partnership firm, maintenance of the books of accounts, their inspection, and the partnership firm’s registration.
How to Govern a Partnership in the Absence of a Partnership Deed?
A partnership deed, alternatively termed a partnership agreement, is a legally binding contract executed by two or more individuals collaborating to run a business with the primary objective of generating profit. Here are few tips of how to govern a partnership in the absence of a Popularity deed:
Profit and Loss Sharing
If the partnership deed does not specify profit or loss sharing ratios, Section 13(b) of the Act mandates equal sharing among partners.
Interest on Capital
Absent any provision in the partnership deed, Section 13(c) states no interest shall be paid on capital.
Interest on Drawings
When the partnership deed is silent, Section 13(c) prohibits charging interest on withdrawals.
Interest on Partner Loans
In the absence of partnership deed provisions, Section 13(d) allows a maximum of 6% interest on partner loans.
Partner Salary/Commission
If the deed lacks mention of partner remuneration, Section 13(a) prohibits any such payments.
Registration of a Partnership Deed
The Indian Registration Act, 1908 mandates the registration of the partnership deed, typically on non-judicial stamp paper worth ₹200 or more, reflecting the firm’s capital. Signed by all partners, each must retain a copy. Registration occurs at the Sub-Registrar/Registrar Office in the firm’s jurisdiction, with varying stamp duty per state, as per the state’s Stamp Act. Notarisation, along with registration, validates the partnership deed legally.
Format of the Deed of a Partnership
Here is a sample format for the outline of a partnership deed
This deed is made on (date, month & year] between:
- Name of the first partner, Son/ Daughter of (father’s name), aged [years], residing at [full address] hereinafter referred to as FIRST PARTNER
- Name of the second partner, Son/ Daughter of (father’s name), [years] residing at [full address], hereinafter referred to as SECOND PARTNER
(Note: if there are more than two partners, their names will come in the same format, and subsequently, they will be referred to as a third partner or fourth partner, as the case may be.)
Whereas the parties hereto have agreed to start a business in partnership, and it is a legal written
partnership deed that contains all the terms and conditions.
NOW THIS PARTNERSHIP DEED WITNESS AS UNDER:
- That the Parties have decide a name mutually, [Name of the company]. Under this name all the activities will be carried out
- That this partnership shall be deemed to have commenced on [Date: Month: Year]
- That the principal place of this partnership business will be situated at [Address, City, State, Pin Code]
- That the business of this firm shall be of (Explain all the proposed business activities of the firm] also, such other trading/manufacturing items, services and business or business as the partners may mutually decide from time to time
- That the duration of the partnership will be frame
- Initially, the firm capital shall be ₹
partnership share wise.
[Mention the contribution in the months/years]
- That the profit or loss of the firm shall be shared [mention how the partners have decided it to share, also mention the share ratio] among all the partners and transferred to the partner’s current account.
Why Is Provisioning Important?
Provisioning helps when certain significant terms which decide the functioning of the partnership firm are missing. It helps resolve the disputes as now you have something from which you can take reference for solving your issues. It also helps in maintaining the proper books of accounts which in turn helps in making the proper financial statements which help understand the progress of the partnership firm as it depicts the profitability position of the concern and also it protects the partners from any unfairness.
For example A, B and C entered into a partnership. C advanced a loan to the firm but since there was no partnership deed between them, A and B exploited C’s position and didn’t pay him any interest. But since provisions of the partnership deed prescribe allowing 6% interest on the partner’s loan, C could easily make his stand and get his money legally.
What Are the Conditions for Provisioning of Partnership Deed?
There are no conditions as such for provisioning of partnership deed, just in the absence of the partnership deed, the provisions of the partnership deed get applicable.
What Is the Process of Provisioning a Partnership Deed?
So, you decide to start a partnership firm with your other partner or partners and then you proceed to draft your partnership deed. Still, you forget to incorporate certain fundamental terms in your partnership deed. Such terms might lead to future conflicts, so that is when the provisions of the Indian Partnership Act,1932 provisions apply. Then you can conduct your business smoothly without any hindrance.
To conclude, in absence of a partnership deed or certain terms in a partnership deed the provisions of the Indian Partnership Act, 1932 become applicable and govern the said partnership. It is also clear how important it is to set the term of the partnership deed with utmost precision and clarity, as a well-defined partnership deed will positively impact your partnership firm’s success. It will cost you time and money now, but it will save you a lot of time, money, and conflicts in the future. But, do not worry if you have not done a partnership deed, as the provisioning of a partnership deed as explained in this article will save you from exploitation.
Conclusion
A partnership signifies a collaborative effort among two or more individuals to conduct business with the aim of earning and sharing profits. Various forms exist, such as Partnership at Will, for a fixed period, for a specific venture, and Limited Liability Partnership, governed respectively by the Partnership Act of 1932 and Limited Liability Partnership Act of 2008. To ensure smooth operations, partners should register their partnership deed, fostering mutual understanding and averting future disputes. Get in touch with Vakilsearch for Partnership deed drafting and registration.
Frequently Asked Questions
What are the legal provisions of a partnership deed?
The legal provisions of a partnership deed outline the agreement between partners regarding profit sharing, capital contributions, decision-making authority, responsibilities, and dispute resolution. It serves as a blueprint for the partnership's operation and helps avoid misunderstandings.
What are the main provisions of the Indian Partnership Act 1932?
The main provisions of the Indian Partnership Act cover aspects such as the definition of a partnership, rights and duties of partners, rules for partnership formation, profit and loss sharing, dissolution procedures, and liabilities of partners, ensuring clarity and legal framework for business partnerships.
What are the provisions related to the registration of partnership?
Provisions related to the registration of partnership include mandatory registration for partnerships with a capital contribution exceeding a specified amount, procedures for registration, submission of necessary documents, and consequences of non-registration, ensuring legal recognition and protection for the partnership entity.
What are the provisions of partnership act when a deed is silent?
When a partnership deed is silent on certain matters, the provisions of the Partnership Act of 1932 come into play, governing issues such as profit and loss sharing, decision-making processes, rights and duties of partners, and dissolution procedures, providing a legal framework for resolving ambiguities.
What are 4 essential points in a partnership deed?
Four essential points in a partnership deed include details about partners' capital contributions, profit and loss sharing ratios, management responsibilities, and procedures for dispute resolution. These elements ensure clarity, alignment, and fairness in the partnership's operation and decision-making processes.
What are the five contents of a partnership deed?
The five contents of a partnership deed typically include the name and address of the firm, names and addresses of partners, nature of business, capital contributions of partners, profit and loss sharing ratios, management responsibilities, and procedures for dispute resolution, ensuring comprehensive documentation and clarity in partnership agreements.
