What is Partnership Deed and Importance of Partnership Deed?

Define partnership deed?

A Partnership Deed is a legal document that outlines the agreed terms and conditions between business partners. It defines how the partnership will be managed, including each partner’s financial contributions, roles, and how profits and losses will be shared. It also includes procedures for handling disputes and dissolving the partnership. The importance of a Partnership Deed is that it ensures smooth business operations and helps prevent misunderstandings by clearly laying out all the key details.

Key Elements of a Partnership Deed

1. Name of the Partnership: The legal name of the partnership business.
2. Partners’ Details: Details on every partner in the partnership, such as names, addresses, and roles.
3. Business Nature and Purpose: The type of business and the purpose of the partnership.
4. Capital Contribution: The sum of money that each partner invests in the company.
5. Profit and Loss Sharing: The proportion that each partner will get from earnings and losses.
6. Duties and Responsibilities: Specific duties and responsibilities of each partner within the business.
7. Duration of Partnership: The period for which the partnership is established, whether fixed or indefinite.
8. Admission of New Partners: Rules for adding new partners to the business.
9. Withdrawal or Death of a Partner: Procedures for what happens if a partner wants to leave the partnership or passes away.
10. Dispute Resolution: Methods for resolving disputes among partners.
11. Dissolution of Partnership: Conditions under which the partnership can be dissolved.
12. Signatures: Signatures of all partners, making the agreement legally binding.

Types of Partnership Deed

1. General Partnership Deed: This is the most common type of Partnership Deed, which sets out the basic rules of the partnership, like who does what, how profits are shared, and other important details. In this kind of partnership, all partners are fully responsible for the business’s debts, so their personal assets could be used to pay off what the business owes.
2. Limited Partnership Deed: In a Limited Partnership, there are two types of partners: General Partners, who manage the business and are responsible for all debts, and Limited Partners, who only invest money and are not involved in running the business. Limited Partners’ risk is limited to the amount they have invested, so they can’t lose more than that.
3. Limited Liability Partnership Deed: An LLP (Limited Liability Partnership) is a modern type of partnership where all partners have limited liability, meaning their personal assets are protected from business debts. In an LLP, partners are not personally responsible for the mistakes or wrongdoing of other partners, and it operates under the LLP Act, 2008 in India.
4. Silent Partnership Deed: In this type of agreement, one or more partners, known as “silent” or “sleeping” partners, invest money into the business but do not actively manage it. Their involvement is minimal, and they are usually only responsible for losses up to the amount they invested.
5. Partnership Deed with a Fixed Duration: This type of Partnership Deed sets a specific time frame for the partnership, like a few years or until a certain project is finished. When this time is up, the partnership ends automatically unless the partners decide to continue it.
6. Partnership Deed for Specific Projects: This type of Partnership Deed is created for a specific project or task. The partnership lasts only until the project is finished, and then it automatically ends.

Major Benefits or importance of Partnership Deed

Having a proper deed provides a legal responsibility between partners of the firm.  However, it need not be registered. Hence, you can run an unregistered partnership firm as well.
Following are some points to prove Importance of partnership deed:

• It regulates the rights, duties, and liabilities of each partner.
• It helps to avoid any misunderstanding between the partners because all the terms and conditions of the partnership have been laid down beforehand in the deed.
• Any dispute between the partners may be settled easily as the partnership deed may be readily referred to.
• It clears confusion as to what should be the profit and loss sharing ratio between partners.
• It clearly mentions who does what. Individual partner’s roles can be defined.
• Partnership deed can also contain clauses which clarifies what should be remuneration (salary) to partners. Usually, remuneration is paid to working partners. However, interest payment is done to all partners who have brought in capital in the business.

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

Recommended Quick Read: Advantages of Partnership Firm over a private limited company

EbizFiling will help you to draft a deed which will keep all ambiguities away and set rights and responsibilities of partners in a partnership firm.

If you wish to get started with a more organised form of organisation, you may also opt for LLP Registration or Private Limited Company Registration.