Partnership Deed is an agreement drafted by the partners that govern the partnership business. Partnership deed may be in oral or writing. But it is preferable to draft the deed in written form so that it can serve as a proof in case of any legal consequences.
Partnership deed is a legal document. It is also known as ‘Article of Partnership’.
ACCORDING TO KOHLER
“Partnership agreement is an instrument drafted and signed by the partners for defining the various rules and regulations of the firm.”
In case, there is no partnership deed drafted by the partners, the provisions of Indian Partnership Act, 1932 applies to the business of partnership.
NAME OF THE FIRM: The name of the firm must not be identical or similar to the name of existing firms.
PRINCIPAL PLACE OF THE BUSINESS: The address of the firm where business is to carried out must be given.
NATURE OF THE BUSINESS: Partners must decide what kind of business the y would do collectively.
COMMENCEMENT OF PARTNERSHIP: Deed must mention the date on which partnership business is going to start.
DURATION OF PARTNERSHIP: the period of partnership must be decided.
CONTRIBUTION OF CAPITAL: How much capital will be contributed by each partner must be decided. The capital may be contributed by the partners in their profit sharing ratio or equally.
PROFIT SHARING RATIO: The partners must decide their mutual profit sharing ratio. In the absence of this, the partners will distribute the profits/losses in equal ratio.
PARTNER’S DRAWINGS: The right of partners to make withdrawal from the business must be mentioned in the partnership deed along with the limit of the withdrawal.
INTEREST ON DRAWINGS: Partnership deed must state the rate of interest on drawings to be charged from partners.
INTEREST ON CAPITAL: What will be the rate of interest on capital of partners must be written in partnership deed. It should also be preferably be stated that in the event of losses, will partners get interest on capital.
INTEREST ON LOAN: What will be the rate of interest on loan to be charged must be mention in the deed.
PARTNERS SALARIES, FEES, BONUS, AND COMMISSION: Will the partners get salaries, bonus, fees, commission from the firm for the work done by them. If yes, then the amount must be specified in the agreement.
METHOD OF KEEPING ACCOUNTS: The accounts of the firm may be kept on cash basis, mercantile basis or hybrid system.
DUTIES, POWERS AND FUNCTIONS OF PARTNERS: The partnership deed must mention the powers, duties, rights and functions of the partners.
VALUATION OF GOODWILL: The method of valuation of goodwill on admission, retirement, death of a a partner and dissolution of firm must be decided.
BANK ACCOUNT: Which partner will operate business account, must be mentioned in the partnership deed.
REFUND TO RETIRING PARTNER: How the firm would refund the share to the retiring partner should be mentioned in the deed.
VALUATION OF ASSETS: The manner in which the assets of the firm should be revalued in case of reconstitution of the firm.
ACCOUNTING PERIOD: The date on which the books of accounts will be closed every year.
ARBITRATION CLAUSE: In case of dispute among the partners, how the matter would be resolved? Who will be the arbitrator? How the arbitrator will be appointed?
USE OF THE DECISION OF THE GARNER VS. MURRAY: Whether decision in the case of Garner Vs. Murray is to apply in case of insolvency of the partner.
AUDITING: Whether the firm’s books will be audited or not? If so, the mode of auditor’s appointment.
IMPORTANCE OF PARTNERSHIP DEED
Partnership deed is an important legal document which defines the relationship among the partners. It is important to have written partnership deed to avoid and settle possible disputes. The following points highlight the importance of partnership deed:
- 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 partnership have been laid down before hand in the deed.
- Any dispute among the partners may be settled easily as the partnership deed may be readily referred to.
- Accounting record becomes the more transparent and genuine, as the partnership deed guides about the various issues of accounting such as interest on capital, interest on drawings, salary, commission etc. payable to partners.
Hence, it is always in the best course to have a written partnership deed duly signed by all the partners and registered under the act.
RULES APPLICABLE IN THE ABSENCE OF PARTNERSHIP DEED
In the absence of partnership deed or verbal agreement, or if the partnership deed is silent on a certain point, the following provisions of the Indian Partnership Act, 1932 will be applicable.
PROFIT SHARING RATIO: Profits and losses are to be shared equally irrespective of their capital contribution.
INTEREST ON CAPITAL: No interest on capital shall be allowed to the partners. If there is a provision for the interest on capitals in the partnership deed, it will be allowed only when there is a profit.
INTEREST ON DRAWINGS: No interest is to be charged on the drawings.
SALARY TO PARTNER: No partner is entitled to any salary or commission for taking part in running the firm’s business.
INTEREST ON LOAN: Interest at the rate of 6% per annum is to be allowed on a partner’s loan to the firm. Such interest shall be paid even if there are losses to the firm.
ADMISSION OF NEW PARTNER: Without the consent of all existing partners no new partner can be admitted to the firm.