Are you looking to establish a partnership firm? In that case, learn the importance and purpose of a partnership deed for a newly incorporated partnership firm. Also, get to know the essential contents of partnership deed that ensure the smooth running of the business
What is a Partnership Agreement?
A partnership agreement is a legal agreement between the partners that contains the terms and conditions of the partnership. The partnership agreement between the partners can either be verbal or written. When the partnership agreement is written, it is known as a ‘partnership agreement’. It contains all the rights, duties, liabilities, and roles of each partner, profit and loss sharing ratio, significant business attributes, interest on drawings, interest on capital, contribution of capital by all the partners, and other relevant information as per The Indian Partnership Act, 1932.
Importance and Purpose of the Partnership Agreement
- The primary purpose of the partnership deed is to avoid misunderstandings between the partners and to ensure the smooth running of the company without any conflicts
- It acts as evidence whenever there are unnecessary litigations in the future
- It also provides clarity and removes confusion regarding the profit and loss-sharing ratio
- The rights, duties, responsibilities, and liabilities of each partner are controlled and monitored by the partnership agreement
- A partnership agreement plays a significant role in the registration of a partnership firm along with other relevant documents like address proof, GST registration, Application-Form 1, etc.
21 Important Contents of the Partnership Agreement
A partnership agreement is nothing but a ‘written partnership agreement’ or a legal document drafted by a lawyer and usually written on a stamped judicial paper. It is duly signed by all partners and registered with the registrar.
If you are caught up in the partnership firm’s registration process and feel intimidated regarding the drafting of the partnership agreement, you have landed at the right place. With just minimal expenses and painless processing, get your partnership firm registered by getting a customised draft of the partnership agreement curated by experts.
While the contents of the partnership agreement are at the discretion of the partners of the partnership firm, however, the partnership deed is mainly comprised of the following 21 important contents, namely:
Name of the Partnership Firm
The firm’s name is determined by all the partners and under which the business is conducted. Here, the firm name shall be in line with the Partnership Act, 1932: https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf
Details of all Partners of the Firm
Relevant details like all the partners’ names, addresses, designation, and other particulars are noted here
Nature of the Business
Whether the firm is dealing with producing goods or rendering services is pointed out. Other business types include distributors of a brand, dealing with retail or wholesale items, importing or exporting goods, etc.
Business Commencement Date
Mentioning the firm’s commencement date helps ascertain partnership accounts, incomes and expenses, receivables and payables, etc.
Whether it is a definite or indefinite period, the duration of the partnership firm is to be mandatorily mentioned.
The entire capital of the firm and the share contributed by each partner are written here.
Profit and Loss Sharing Ratio
This can either be in the same capital contribution ratio or other agreed ratio as may be specified. This indicates the profit and loss sharing ratio between partners.
Interest in Capital and Drawings
The idea behind giving interest on capital and charging interest on drawings is that when the same amount is invested elsewhere, it will yield a certain interest known as return on investment. Deciding interest in capital and pictures can avoid further misunderstandings and conflicts between the partners.
Location of the Business
From where and from which location the business will be operated is to be noted.
Salary and Commission Payable to Partners
Salary and commission, if any, payable to the partners based on their capabilities, business role, and any other capacity is to be included.
Rights, Duties, Responsibilities, and Power of Each Partner
The duties and rights of each partner are clearly mentioned to avoid further disputes. Classifying between sleeping partners, active partners, nominal partners, minor partners, and designated partners helps determine the power and role of each partner in the firm.
Maintenance of Accounts and Voluntary Audit
How the partnership accounts are to be maintained and prepared is indicated. Arrangements for a voluntary audit, even though the audit is not compulsory, can provide the firm with various advantages of the audit.
Goodwill Valuation Method
Which method is used in determining the value of goodwill? Partners decide which goodwill valuation method is to be used, whether it’s the annuity method, capitalisation, super-profits or any other method.
Periodicity of Accounts
With the help of emerging technologies and advanced accounting software, the partnership accounts are updated promptly and automatically without any delay. However, the financial statements are to be prepared and presented at the end of each year to evaluate the performance and position of the business.
Segregation of Work
Having a clear understanding of the scope and division of work can serve as evidence and also helps in holding the partners accountable for their share of work.
The partners decide the specific bank for all business transactions and can open other accounts in other bank branches if needed.
Settlement of Accounts
Dissolution of the business. This can happen when the business is at a loss or when the purpose of the business is accomplished. This helps to settle accounts hassle-free, either during dissolution or with outgoing and incoming partners.
The Dispute Among Partners
Even though the partnership agreementis drafted, it is inevitable for disputes among the partners. In this case, the partners need to decide the arbitration in case of disputes and the solution approach.
Partner Becoming Insolvent
There is a chance for the partner(s) to become insolvent. So, it should indicate what the arrangements are in that case, how will the deficiency be covered, and in which ratio.
This clause contains the suggestions as to whether the business should borrow loans or not, if yes, at which interest rate, properties need to be pledged, etc.
The above-mentioned contents of a partnership agreement are not exhaustive but an inclusive list. Any other clauses that may seem necessary based on the business and its requirements can be included with the mutual consent of all the partners.
A partnership agreement is one of the main requirements in the partnership firm registration process. A partnership deed’s inclusive list of contents can vary across firms, based on various criteria. If there is any need for change in the contents of the originally drafted partnership agreement, then the change can be effective only with the mutual consent of all the partners. Even though an oral partnership agreement is valid, a written partnership agreement has its advantages that help the business’s smooth running, thereby ensuring the business objective is accomplished. For further queries reach out to Vakilsearch.
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