What is a partnership deed? (know the meaning, content, future, and Importance of partnership deed)

partnership deed

(1) Introduction:

The partnership is one type of business method that helps to optimize business as an entrepreneur or 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 is some question arises, whether the partnership is required? Whether it should be a Compulsory method for running any business? What kind of benefit can we get from running a business 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 relation between the party involved in the Partnership business, 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.

As per the partnership act, 1932 under section 4 defined the definition of partnership which 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 easily be known that what is a partnership deed?

We can say that the main concept of the partnership deed is the same as a definition of partnership. In simple words, we can say that a partnership deed is one kind of agreement between two or more persons to running their business or organization, and they agree to share its profits and loss.

In the partnership, there is no requirement for all parties to run a business. Anyone on behalf of all can manage the business.

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 partner should be maintained. That gives more flexibility and transparency to their relationship as a partner of the partnership firm.

The best future of the partnership deed is that it is legally binding to all partners of the firm, anyone can not escape with his duties according to the terms and conditions of the Deed.

After all this thing, it is not mandatory to create a partnership in writing form an oral partnership may also valid 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].

But it is advisable to create a deed of partnership in writing form. It will help to avoid future disputes or misunderstandings among the partners of the firm.

One another thing we should know that there is no mandatory requirement to register a partnership firm. Unregister partnership 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 it is advisable that 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 understandings of partners of the firm.

Here below mentions some key point that should be remembered at the time while preparing a partnership deed.

  • Name of firm, that name the partner want to start a business. As well as the nature of business.
  • Mention the full name and address of all partners.
  • Mention the date of partnership whenever they establish the firm.
  • The existence time limit for running a partnership firm.
  • Detail of the capital amount, which is contributed by the partners of the firm.
  • 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, date of accounting, maintenance of an account, as well as the date of an audit of an account, etc.
  • Specify what type of rules 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 rule regarding the death of a partner, retirement of a partner, and upcoming or enter 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, according to 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 required to start a partnership firm business. It will depend on the nature of the business and as per the desire of 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 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 liabilities of the partners that make 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.

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