Why Is Partnership Deed Essential In Partnership Business?

Partnership Deed – Meaning

A partnership is a kind of business in which the business partners agree to be co-owners, distributing responsibilities, and sharing their profits, and losses to run the organisation. A partnership deed is a written partnership format which legally documents the features of business partnerships.

What Is a Partnership Deed?

Also known as Partnership Agreement, a Partnership Deed is a record that discusses all the duties, rights, liabilities, contribution of capital, and other functionalities and business-related details of all the parties concerned in the business operation. Partnership deed documents the terms and conditions of the firm. When these businesses get registered by name, it is called a partnership firm. The partnership deed becomes the partnership deed of a firm.

Is Partnership Deed a Contract?

A partnership deed is a legal contract between all the partners in the partnership business which provides a framework, regulates the smooth running of the business, and helps to solve the problems which may arise anytime in the future.

The Necessity And Importance Of a Partnership Deed

A partnership is concerned with the business aspects among partners of the business. Having a legal written document is more professional and useful as evidence, serving as a legal guiding framework in the partnership business rather than blind trust in word of mouth. It elaborates on the business needs, eliminating confusion, which is the prime necessity of the partnership deed.

The importance and reasons for creating a partnership deed are as follows:

  1. A well-drafted partnership deed specifies the names of the partners, their rights, liabilities, profit sharing ratio, capital investment, and makes a partnership between the individual partners in the partnership business.
  2. It brings clarity among the business partners, as it explicitly states every partner in detail and their role in the organisation along with the takeaway benefits.
  3. If a dispute occurs anytime in the future, referring to the partnership deed can help reach a mutual settlement.
Does the Partnership Deed Require Registration?

Although it is optional under Section 58 of the Indian Partnership Act, 1932, partnership deed registration has its advantages. A firm can register itself through an application with the Registrar of Firms, that has jurisdiction where the firm is situated, or at its proposed site. The business can apply for registration at any time. A registered partnership firm enjoys legal benefits over an unregistered one. The partnership deed of a firm gives it the ability to sue third parties, and claim a set-off from a third-party.

Registration of Partnership Deed of a Firm – Contents
Partnership deed contents must include the following:

  1. The firm’s name is accepted by all the partners but shouldn’t carry titles like a company or private company.
  2. It should cover the nature of the business, origin date, headquarters, and branch addresses of the firm.
  3. The name and address of the partners involved, the individual contributions and interest of the partners to the capital, the profit-sharing ratio, and salary.
  4. It should mention the duration or term, until which the partnership will be active.
  5. It should list the rights and duties of the partners.
  6. It should state the interest charge and the maximum amount of drawings for a business partner, and the method of calculating goodwill.

The partnership deed can change with the mutual consent of all the partners. The deed should be as per the Stamp Act and should be registered under the Registrar of Firms.

Clauses of a Partnership Deed
1. Profit-sharing clause
One partner might be a working partner who has not contributed to the initial investment of the firm and hence will get a lesser share of profit as compared to the partners who have invested a higher sum of money. The profit-sharing clause gives an understanding of the split of the losses and gains among partners. It helps to ease out legal issues, should any disputes occur in the future.
2. Capital Contribution Clause
It states the amount of capital every partner has individually brought into the firm, its usage, and the availability of repayment after exiting the firm. There is a need to tally the capital investment and expenditures against the name of each partner.
3. Dispute Resolution Clause
The dispute resolution clause is future planning that states all disputes will be settled through mediation and arbitration.
4. Retirement/Termination Clause
It states the conditions that could lead to the termination of a partner along with the retirement age. It also guides a person on how to get out of the partnership. It also discusses the return on the capital invested, if any.

How Are Partnership Deed Amendments Made?

The Registrar of Firms needs to be informed about the amendment by the new, preceding, or cordial partner of the change in the partnership deed.

Following these steps, one can amend the partnership deed:

  1. Draft another partnership deed with the adjustments. Fill the form you need to opt with capital letters, pay the challan fees, and submit the application to the concerned Register of firms of the state.
  2. After submission and approval by the Registrar, s/he will pass the announcement in the Register of Firms, and issue a certificate with changes in the partnership firm.

The documents that need to be submitted along with the partnership deed amendment form are the duplicates of old and new partnership deeds verified by the notary of the town where the firm is present along with a stamp paper of Rs. 1000, ID proofs and passport size photos of the accomplices alongside conceded accomplices bore witness by a notary, duplicates of the receipt challan, possession verification of the new place of business, and photocopies of Certificate A and C.

Types of a Partnership Deed

There are three types of partnership deeds:

  • General Partnership shares complete control of the firm equally among the partners.
  • In a limited partnership, one partner has complete authority, the others have limited say in the organisation.
  • In a limited liability partnership, every member holds liability to some extent of their business investment.

In conclusion, a partnership deed is a necessary legal document that eases out business operations and provides clarity on the distribution of duties and responsibilities.

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