What happens when you enter into a partnership without a partnership deed? In the absence of a partnership deed in written form, you might suffer losses of some benefits which can be eligible as a partner of the partnership firm. So it is always advisable for you if you want to enter into a partnership firm indeed do a partnership deed in a wring form. Here is one thing you should note, the oral partnership is also valid, and there is no requirement for registration of a partnership firm in India. But that may harm your legal rights when any dispute arises during the partnership business. But it means not that there are no legal remedies available to you to protect your right. This article discusses what happens in the absence of a partnership deed between the firm’s partners.
In the absence of a partnership agreement, how are mutual relations between the partners governed?
In case there is the absence of a partnership deed, you still have some of the remedies available, which are governed according to provisions of the Indian partnership act,1932. in this article, we discuss what kind of standard rule will apply when no partnership deed is available for the firm business.
Generally, the partnership deed is signed by persons who want to enter the partnership business. They all mutually agree on the terms and conditions of the firm’s business. The partnership business governs under the Indian partnership Act.
That Act also specifies the firm partners’ rights, duties, and responsibilities. That Act’s provisions protect the partner’s legal rights and obligations. However, the partners are free to modify or change their part of the obligation and terms and conditions with mutual understanding with the consent of the others partners.
The partners have no restrictions regarding how to manage their contractual rights, duties, obligations, and responsibilities under the Indian Partnership Act. But, sometimes, provisions of the Act are not legally binding on the partners when they make any contrary provisions. With the consent of other partners, the firm’s partners can modify the terms and conditions either verbally or in writing form.
Which provision of the Indian Partnership Act govern during the absence of a partnership deed?
The partnership deed covers all aspects of the partners of the firm. But, sometimes, they mutually agree on the terms, conditions, rights, duties, obligations, responsibilities, etc. But the partners do not create a partnership deed. Then, the question comes to our mind if the lack of a partnership deed or absence of a partnership agreement, what remedies will help the firm’s partners protect their rights in the business?
As we refer to the provisions of the Indian partnership Act,1932. the following requirements are available;
It is advisable to do a partnership deed because it is a legal document that helps the partners to sort out unnecessary misunderstandings if any arise among them. And also, due to a written partnership deed, the partners can efficiently resolve their dispute without approaching a court of law. In the written partnership deed, partners can enter the interest clause; however, if the partners do not create a partnership agreement or deed. In that case, the firm’s partners are eligible for interest on loans and advances. Also, their ratios of profit will be equal. But, one thing we should note is that they are not entitled to salary and commission from the firm in the absence of the partnership deed.
Interest on capital
The interest on capital will be paid to the partner if the firm business earns profit, but that should be a particular clause mentioned in the partnership agreement. Such interest on capital will not be paid to the partner in the event of a loss. That’s why if the partnership deed is not in writing, the firm’s partners are not entitled to receive interest.
Interest on drawings
No interest will be charged from the partner on drawing whatever they make.
Salary and commission to the partner
Without specified in the partnership deed, the firm’s partner is not entitled to receive any salary or commission from the firm business.
Interest on Loan
The firm’s partners are entitled to receive an interest rate of 6 % on the money they lend as a loan to the firm.
The Ratio of Profit Sharing
No matter how much capital is contributed by the partner in an individual capacity of the firm business. Each partner of the firm receives an equal part of the profit of the firm’s business.
As mentioned earlier, the provisions are applicable in the absence of a partnership deed. No matter how much capital they contribute to the firm’s business, the profits and losses are equally shared among them. If the partner did any work, they do not entitle to a salary or commission for that. However, as per the provisions of the Indian Partnership Act,1932, in the absence of a partnership agreement, the partners are allowed a 6% interest in the case of an advance or loan given by the partner to the partnership firm.
What is a partnership deed? (know the meaning, content, future, and Importance of partnership deed)
What is the Pros and Cons of a Partnership?
Types of Partners in the Partnership firm under the Partnership Act.