(1) Introduction:
A partnership is one type of business method that helps optimize a business as an entrepreneur or an existing business in any country. In this way, we can say a partnership is a popular and unique method to achieve any business goals between co-owners.
Now, here, some question arises: Is the partnership required? Should it be a compulsory method for running any business? What kind of benefit can we get from running a company through a partnership?
Here in this article, with a better understanding of this business concept, we are trying to get these answers.
(2) What is a Partnership?
A partnership means to mention the relationship between the parties involved in the partnership business, which is called a partner. There are different types of partnership arrangements available in such kinds of business. All partners can decide their share regarding the business responsibilities, liabilities, profits, etc., according to the partnership business.
The Partnership Act 1932, under Section 4, defined the definition of a partnership is here given below:
4. Definition of “partnership”, “partner”, “firm”, and “firm name” “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”[1].
(3) What is a Partnership Deed?
Now, after understanding the meaning of partnership, we can quickly know what a partnership deed is.
The central concept of the partnership deed is the same as the definition of partnership. In simple words, a partnership deed is one agreement between two or more persons to run their business or organization, and they agree to share its profits and losses.
In the partnership, there is no requirement for all parties to run a business. Anyone can manage the company on behalf of all.
At the time of preparation of a draft of the Deed of partnership, all individual partners can contribute their ideas to deciding the terms and conditions of firm business. They can explain their ideas about what kinds of relations between the partners should be maintained. That gives more flexibility and transparency to their relationship as partners of the partnership firm.
The best future of the partnership deed is that it is legally binding to all partners of the firm, and anyone can not escape from his duties according to the terms and conditions of the Deed.
After all, it is not mandatory to create a partnership in writing, but an oral partnership may also be valid for the same purpose of business between the partners. In the case of Dwarakadas and Co. v. Income-tax Commissioner (AIR 1956, Bom 321), the Bombay High Court held that What is overlooked is that the law does not require that a partnership deed should be in writing. The agreement of partnership may be oral, and the oral partnership agreement is as effective as a written partnership agreement.[2].
However, it is advisable to create a partnership deed in writing. It will help to avoid future disputes or misunderstandings among the partners of the firm.
We should know that there is no mandatory requirement to register a partnership firm. Unregistered partnerships are also valid according to the provision of the Partnership Act in India. However, due to an unregistered partnership firm, some restrictions may arise that are given below.
(4) The effect of non-registration of partnership:
According to the provisions of the Partnership Act,1932. under section 69 defined some Effect due to the non-register of a partnership.
Under section 69 (1), A partner of an unregistered firm can not file a suit as a partner of the firm against the other partners of the firm to establish the right created by the contract.[3].
Under section 69 (2), No lawsuit to enforce a right arising from a contract shall be brought against any third party in any court by or on behalf of the firm unless the firm is registered. That way, the partnership deed should be registered.[4].
(5) Content of Partnership Deed:
There is no prescribed format available for the drafting of a partnership deed because it may change according to the category of business, and it also depends on the understanding of the firm’s partners.
Below are some critical points that should be remembered while preparing a partnership deed.
- Name of a firm that the partner wants to start a business and the nature of the company.
- Mention the full name and address of all partners.
- Mention the date of partnership whenever they establish the firm.
- The existence of a time limit for running a partnership firm.
- Detail of the capital amount, which the partners of the firm contribute.
- The ratio of sharing of profit and loss among partners.
- Whether the partner is allowed to take a loan? Mention the interest rate thereon, if permitted.
- Describe the salary amount, commission, etc., that is payable to the partner.
- What kind of power is given to the partner to perform his duty?
- Mention details of accounts, like the date of accounting, maintenance of an account, and the date of an audit of an account.
- Specify what type of rules are available if any dispute arises between the partners.
- Full details of bank accounts and rules regarding their operation.
- Mention the detailed rules of a settlement of accounts at the time of the dissolution of a partnership firm.
- Mention the full details of the rule regarding the death of a partner, retirement of a partner, and upcoming or entering a new partner, etc., into the firm.
- Details rule of calculation of goodwill of the firm.
- Mention the details rule if any partner becomes insolvent in the future.
We are trying to cover most of the clauses. Those should be added by partners when establishing a new business firm.
(6) Future of Partnership Deed:
- In a partnership deed, a minimum of two partners is required.
- There is no minimum capitalization needed to start a partnership firm business. It will depend on the nature of the business and the desire of the partners of the firm.
- The partners of the firm must have mutually agreed upon before the start of the firm business.
- The terms, conditions, and ratios regarding the profit & loss should be prior decided by the partner before starting a business.
- All active partner who runs the business of the firm should be responsible for their works of operation of a business.
- All clauses should be mentioned with specifications in detail in the Deed.
- All partners are required to sign the partnership deed at the time of registration.
(7) Importance of Partnership Deed:
After considering the best future of partnership deed that has some more Important benefits, like
- It helps to avoid disputes among the partners of the firm.
- The partners of the firm may mutually decide their rights and responsibilities regarding the business.
- It helps to define all the partners’ liabilities and creates more transparency between the partners.
(8) Reference:
(1) Section 4 of the Indian Partnership Act, 1932.
(2) Dwarakadas and Co. v. Income-tax Commissioner (AIR 1956, Bom 321)
(3) Section 69 (1) of the Indian Partnership Act, 1932.
(4) Section 69 (2) of the Indian Partnership Act, 1932.
