All you need to know about drafting a good Partnership deed-Contents, conditions, and importance explained

What is Partnership?

A partnership firm is a form of business where two or more people share ownership, as well as the responsibility for managing the company and the income or losses the business generates. That income is paid to members, who then claim it on their personal tax returns – the business is not taxed separately, as corporations are, on its profits or losses. In this blog there will be detailed information on partnership deed, and its importance. 

What is a Partnership Deed?

• In simple terms, a Partnership agreement means a written agreement between two or more partners. When important terms and conditions regarding the business are agreed upon and put up in writing and signed by all partners, such agreement is called ‘Partnership Deed’.
• The terms and conditions contained in the Deed are called Articles of Partnership.
• Partnership Deed mainly contains details regarding internal management as well as relations with external parties such as debtors and creditors.

Conditions for a Valid Partnership Agreement 

• A valid Partnership deed should be properly stamped as per the provisions of the Indian Stamp Act
• It should be signed by all the parties.
• A copy of the same should be given to all the Partners

Contents of Partnership Agreement (Deed)

• Names and Addresses of the firm and its main business
• Names and Addresses of all partners
• Date of commencement of business
• Capital contributed by each partner
• The accounting period of the firm
• Duration of the firm’s existence
• Rules regarding an operation of Bank Accounts
• Profit and loss sharing ratio
• The rate of interest on capital, loan, drawings, etc
• Mode of auditor’s appointment, if any
• Salaries, commission, etc, if payable to any partner
• The rights, duties, and liabilities of each partner
• Treatment of loss arising out of the insolvency of one or more partners
• Settlement of accounts on the dissolution of the firm
• Method of a settlement of disputes among the partners
• Rules to be followed in case of admission, retirement, death of a partner and
• Any other matter relating to the conduct of business. Normally, all the matters affect the relationship of partners amongst themselves.

Importance of a Valid Partnership Agreement (deed):

Having a partnership deed is not mandatory or compulsory by law but it is desirable because of the following reasons:

• It regulates the rights, duties, and liabilities of each partner.
• It helps to avoid any misunderstanding amongst the partners because all the terms and conditions of the partnership have been laid down beforehand in the deed.
• Any dispute amongst the partners may be settled easily as the partnership deed may be readily referred to.
• Having a deed presents a legal liability amongst the partners.
• In case of disputes, it can be produced as important evidence.
• It would be helpful if the Firm is willing to register the Partnership under the Act.

Hence, it is always the best course to have a written document instead of oral agreements. 

Suggested reads: Everything about GST registration of a Partnership firm