Last Updated on September 2, 2024 by Kanakkupillai
A partnership deed is usually a very important document that forms the legal foundation of a business partnership in India. It thus defines the terms, conditions, and expectations of the parties, lowering tensions. This article will discuss the value of a partnership deed, its main components, legal obligations, and some common mistakes to avoid.
Understanding partnership deed
A partnership document is legally governed by the Indian Partnership Act, 1932. It lists the rights, duties, and liabilities of the partners. The deed provides a model for the collaboration, defining how the business will be conducted, how profits and losses will be split, and how disagreements will be resolved. A well-written partnership deed helps to avoid misunderstandings and legal issues that could endanger the business.
Important in a Deed of Partnership
Important features of a well-organized partnership deed should be as follows:
- Clearly specify the name of the cooperation firm to ensure it is unique and not too similar to present businesses.
- Clearly state the kind of commercial activities the cooperation will do to contribute to reducing uncertainty.
- Show the capital contribution of every partner to ensure financial transparency.
- Describe how a crucial component of the transaction, earnings and losses will be distributed among parties.
- Clearly allocate responsibilities to every partner to provide effective management and aid to prevent conflicts.
- Tell if the connection is a continuous or fixed term.
- Two approaches to include conflict resolution strategies to aid in avoiding costly legal battles are mediation and arbitration.
- Explain how existing partners might be retired or how new ones are accepted.
- Clearly state the requirements, including a split of assets and liabilities for winding up the business.
Legal Requirements for a Partnership Deed
The legal enforceability of the partnership deed depends on several requirements that must be satisfied:
- Stamp Duty: stamp duty rules require that the deed must be executed on acceptable value non-judicial stamp paper.
- Notarizing the deed helps its legal situation even if it is not necessary.
- Although it is voluntary, additional legal protection and registration with the Registrar of Firms is suggested.
Advantages of a Well-Drafted Partnership Deed
- A formal partnership agreement that is done well has many benefits.
- All partners may understand their responsibilities, duties, and business operations by means of openness and transparency.
- Legal protection provides a framework for resolving conflicts and safeguarding partner interests.
- Flexibility allows one to adjust to accommodate new circumstances as the business grows.
- Good documentation helps to avoid problems with tax authorities and facilitates the enjoying of tax benefits.
Common Mistakes to Avoid in a Partnership Deed
Write a partnership deed avoiding these common mistakes:
- Use accurate, simple language in the deed to help prevent misunderstandings.
- Ignoring Future Scenarios: Manage probable future events such as corporate expansion or partner exits to ensure stability.
- See a legal practitioner over the deed to confirm respect to legal requirements and preservation of all partner interests.
Partnership Deed Sample Format
A sample word format of a partnership deed is provided hereunder:
Deed of Partnership
This deed of partnership is made on [Date, Month, Year] between:
- [First Partner’s Name], [Son/Daughter] of [Mr. Father’s Name], residing at [Address Line 1, Address Line 2, City, State, Pin Code] hereinafter referred to as FIRST PARTNER.
- [Second Partner’s Name], [Son/Daughter] of [Mr. Father’s Name], residing at [Address Line 1, Address Line 2, City, State, Pin Code] hereinafter referred to as SECOND PARTNER.
- [Third Partner’s Name], [Son/Daughter] of [Mr. Father’s Name], residing at [Address Line 1, Address Line 2, City, State, Pin Code] hereinafter referred to as THIRD PARTNER.
- [Fourth Partner’s Name], [Son/Daughter] of [Mr. Father’s Name], residing at [Address Line 1, Address Line 2, City, State, Pin Code] hereinafter referred to as FOURTH PARTNER.
The parties to this agreement have agreed to start their firm as a partnership, and a written instrument of partnership is advisable. Now, the following is attested to by this partnership deed:
1. BUSINESS ACTIVITY
The parties in this agreement have mutually decided to conduct the business of [Proposed Business Activity Description].
2. PLACE OF BUSINESS
The partnership’s primary location will be at [Address Line 1, Address Line 2, City, State, Pin Code].
3. DURATION OF PARTNERSHIP
The partnership’s duration is flexible.
4. CAPITAL OF THE FIRM
The firm’s initial capitalization will be Rs. [Total Partners’ Contribution].
5. PROFIT-SHARING RATIO
All partners will get an equal share of the firm’s profit or loss, which will be sent to each partner’s current account.
6. MANAGEMENT
The managing partner of the firm will be the [First Partner], who will oversee all daily business operations and any legal actions taken on behalf of the firm. The other partners will work with him to carry out this responsibility.
7. OPERATION OF BANK ACCOUNTS
The business must open a current account at any bank in the name of [Partnership Firm Name]; this account must be managed jointly as stated to the banks from time to time by [First Partner] and [Second Partner].
8. BORROWING
To get credit facilities from any financial institution, each partner will need written approval.
9. ACCOUNTS
The firms must routinely keep property books of account, which are often kept at the firm’s place of business, and include true and correct records of all their transactions as well as all of their assets and liabilities. The balance sheet must be thoroughly audited and signed by all partners before the accounting year, which begins on April 1, becomes the financial year. Each Partner is entitled to access the books and the opportunity to confirm their accuracy.
10. RETIREMENT
If any partner decides to leave the company at any point while the partnership is still in existence, he or she is permitted to do so as long as he or she gives the other partners at least one calendar month’s notice. The retiring partner or his legal representatives must receive payment from the surviving partner for the purchase price of their portion of the company’s assets.
11. DEATH OF PARTNER
In the case that one or more partners pass away, one of their legal representatives automatically joins the company as a partner. If the legal representation decides not to join, they will still get a portion of the purchase price computed as of the partner’s passing date.
12. ARBITRATION
Every time there is a disagreement or dispute between the partners, the partners must refer it to a single arbitrator. The Indian Arbitration Act, which is now in effect, shall regulate such arbitration proceedings and shall be final and binding on all parties.
This partnership agreement has been signed, sealed, and delivered at [City, State] on [Day, Month, Year] in witness thereto.
FIRST PARTNER SECOND PARTNER
[Address Line 1] [Address Line 1] [Address Line 2] [Address Line 2] [City, State, Pin Code] [City, State, Pin Code]THIRD PARTNER FOURTH PARTNER
[Address Line 1] [Address Line 1] [Address Line 2] [Address Line 2] [City, State, Pin Code] [City, State, Pin Code]WITNESS ONE WITNESS TWO
[Address Line 1] [Address Line 1] [Address Line 2] [Address Line 2] [City, State, Pin Code] [City, State, Pin Code]An agreement outlining the terms and conditions of a partnership between partners is known as a partnership deed. One of the most common forms of business to launch is a partnership firm.
Clear communication between partners about the numerous rules regulating their partnership is necessary for the efficient and effective operation of a partnership firm. The partnership deed accomplishes this. In order to provide the partners with clarity, it stipulates a number of terms, including profit-and-loss sharing, remuneration, interest on capital, drawings, admission of a new partner, etc.
Partnership deed between two partners
This partnership agreement is made between……….. on this………..day of……….. son of………. living in……….of the one portion and………. son of……… dwelling in the other part at……….
This deed witnesseth and the parties hereby agree as follows:
- The parties hereto shall carry on business in co-partnership as manufacturer and trader of jute goods under the name and style of ……………………………. Brothers at………with effect from…………until the expiration of …………………months’ notice in writing to determine the partnership left by either party for the other at the place of business of the firm, at any time after the…………day of…………subject to the terms and conditions hereunder contained and subject to such change in the constitution of the firm, if any, hereafter effected by addition, withdrawal, retirement or expulsion of partner or partners.
- The firm must register under both the Income Tax Act and the Indian Partnership Act within………days of the business’s launch, and the rules outlined in both acts must be followed by the firm.
- The name of the business will be “Eastern Law House,” although the partners may later choose a different name if they so choose.
- The firm’s operations will currently take place at………., etc., or any other location(s) that the partners may later choose on a case-by-case basis.
- An amount of Rs. shall currently make up the firm’s capital. To be paid shortly after the performance of these presents and to be contributed by the partners in equal amounts. Each partner is entitled to interest at the rate of………% per year on the capital that is recorded to his credit in the firm’s books. This interest is cumulative, so any shortfall for any given year will be made up from the profits of the succeeding year or years, with the exception of when the firm experiences a loss.
- If any partner is required to advance any additional funds beyond the percentage of capital he has agreed to provide or chooses to keep his share of net profits undrawn at any annual general accounting, he will also be entitled to interest thereon at the rate of………% per year, unless the other partner or partners require him to do so, in which case the interest will stop accruing.
- All business costs and expenses must be covered by the capital and profits of the company, or, in the event of a shortfall, by the partners in equal parts.
- Messrs…………….., etc., or such other bankers as the partners may from time to time mutually agree upon, shall serve as the firm’s bankers. All funds, checks, and other securities belonging to the firm, excluding those needed for immediate expenses, must be paid into or deposited with the aforementioned bank.
- Every check issued for an amount greater than Rs. Each partner has the ability to sign any additional checks written in the firm’s name separately. Both partners must sign all bills and other papers that are necessary for the firm.
- The partners shall bear equal responsibility for and ownership of the earnings and losses.
- In the case that the partners unanimously or by a majority vote decide to enhance the capital, the additional capital, unless otherwise agreed, shall be contributed by equal shares.
- Partners may agree to draw out a certain amount, up to a maximum of Rs……… per month, in advance; however, if general accounts are taken at the end of any year and it is discovered that one of the partners has drawn out more money than his share of the profits for that year, the excess must be immediately returned.
- Each partner shall actively attend to the partnership’s business and conduct it so as to maximize the benefits to the partners. Neither partner shall be directly or indirectly involved in any trade or business other than the partnership.
- Partners must promptly settle all of their individual debts and obligations, as well as indemnify and maintain the firm’s effective indemnification against them.
- No partner shall, without the consent in writing of the other partner or partners for the time being, release or compound any claim or debt due or owing to the firm or otherwise compound or settle the same or diminish any security without receiving the full amount thereof, or lend any money or deliver on credit goods belonging to, or otherwise give credit on behalf of, the firm other than in the usual course of the business of the firm, or contract debts and liabilities exceeding Rs……….or institute suits or proceedings or make himself liable as surety for any person, or sell, transfer or assign or otherwise deal with either absolutely or by way of mortgage or declaration of trust, his share or interest in the firm, or the profits and/or benefits thereof except in favor of another partner or do, execute or perform or suffer to the contrary any act, deed or thing whereby the property of the firm may be exposed to the danger of being seized, attached or taken in execution, when and in such an event he shall be liable to be expelled from the partnership, if so decided by the then majority of partners, who may in the alternative file a suit for dissolution of the firm with all consequential reliefs.
- The partners are required to keep and update accurate books of accounts. Each partner or his agent may see the books of account, securities, vouchers, etc., at any reasonable time, and copies may be made. These records must be preserved at the firm’s location.
- On the ……… day of……… and on that day of every succeeding year, during the continuance of the partnership, a general account of the preceding year shall be taken and a just valuation made of all the assets and liabilities of the firm; such general account shall be audited by such registered accountant as the partners shall from time to time mutually appoint, and shall be entered in a book and signed by both the partners, and when so signed, the entries in such book shall be binding on both, provided that, if within-months from the date of the signing of the book any manifest error shall be found therein, such error, shall be rectified. All profits (after setting apart an amount equivalent to ……… % thereof as Reserve Fund to meet emergent expenses) and loss shall be divided as aforesaid after such signature.
- When a partner dies, retires, or becomes bankrupt, the partnership does not automatically dissolve; instead, it is wound up and its assets and obligations are handled in line with the Indian Partnership Act.
- The other partner may immediately dissolve the partnership by notice in writing, may subsequently carry on the business alone, may publish notice of the dissolution in the local Official Gazette and in the vernacular newspaper, and may also inform the Registrar of Firms in writing. This option is available if any partner violates any provision of the partnership agreement, goes insane, or is declared insolvent.
- Upon the dissolution of the firm, either by the death of a partner or by notice under cl. (19) The other partner may purchase his shares in the effects at a valuation to be made by arbitrators or their umpire, as hereinafter mentioned. The price, when ascertained, shall be paid by three (or etc.) equal installments at the end of four, eight and twelve calendar months (or, etc.), from such date of the award by the continuing partner or purchaser, who shall also execute all deeds and things necessary for indemnifying the outgoing partner or his estate from all the liabilities of the firm; and the outgoing partner or his representatives shall execute all such deeds and documents and do all acts necessary for effectually vesting in the purchaser the share purchased, including the goodwill, and the outgoing partner shall not carry on, or be engaged in any business competing with or interfering with the business of the firm, within a radius of………miles of, etc., during the remainder of the term of the said partnership term.
- Any notices required to be given to either partner under this agreement will be deemed to have been properly served if they are sent by registered mail to the partner’s address at the firm.
- Any dispute or difference which may arise between the partners or their representatives with regard to the construction, meaning and effect of this deed or any part thereof, or respecting the accounts, profits or losses of the business, or the rights and liabilities of the partners under this deed, or the dissolution or winding up of the business, or any other matter relating to the firm, shall be referred to arbitration and the decision of a sole arbitrator, if the parties in dispute so agree, otherwise to two or more arbitrators, according to the number of the partners of the firm one to be nominated by each party or his representative and in case of difference of opinion between them, by the umpire selected by them at the commencement of the reference and this clause shall be deemed to be a submission within the meaning of the Arbitration and Conciliation Act 1996 including its statutory modification and re-enactment.
In witness whereof the parties hereto have executed these presents on the day, month and year first above written.
Signed, sealed and delivered by ………………………….. in the presence of:
Signed, sealed and delivered by ………………………………in the presence of:
Features of Partnership Business
- A partnership business must have at least two members.
- Banking Business Partnership, with a maximum of 10 members.
- Nonbanking business partnership with a member cap of 20 or less.
- Because partners can form a partnership with any amount of capital they choose, there is no set minimum capital requirement.
- Before launching a company, partners should have a mutual understanding.
- Prior to the partnership document being signed, the ratio of profit to loss should be determined.
- Each partner or active member is accountable for the actions of other partners or active members.
- If you register your business as a partnership entity, an auditor is not necessary.
Conclusion
An Indian business partnership requires a partnership deed to provide a strong foundation. Including all necessary conditions and ensuring legal compliance allows partners to protect their rights, prevent conflicts, and ensure flawless business operations. Making investments in a complete partnership deed is a first step towards long-term prosperity.
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