Partnership Deed - Definition and Importance

A partnership deed is a legal document that specifies the terms for a business operated by two or more individuals. It addresses key elements such as profit-sharing, responsibilities, rules, and other important details. Also referred to as the Partnership Agreement, this document carries legal significance. Beyond being a legal record for court purposes, it offers advantages like eligibility for a PAN, the ability to open a bank account, and obtaining GST registration or an FSSAI license for the business. Grasping the definition of a partnership deed is essential for establishing and managing partnerships effectively.

A partnership deed is a written legal document that outlines an agreement between two people who intend to do business together and share profits and losses. It is also known as a partnership agreement. This document offers several advantages, like obtaining GST registration and getting an FSSAI license.

What is a partnership deed?

A partnership deed is a legal document that serves as the foundation of a partnership firm, defining the terms of the partnership agreement among its members. This comprehensive document outlines various aspects of the partnership, including the roles, responsibilities, rights, and obligations of each partner involved. It specifies essential details such as the name and address of the partnership firm, the names and addresses of the partners, the nature of the business, the capital contributions made by each partner, and the profit-sharing ratios agreed upon.

Additionally, a partnership deed may cover other critical aspects such as the duration of the partnership, decision-making processes, and procedures for admitting or retiring partners, methods for resolving disputes, and provisions for the dissolution of partnership firm. By clearly documenting these terms, a partnership deed helps in establishing mutual understanding and trust among the partners, minimizing conflicts, and ensuring the smooth operation of the partnership business. It provides legal recognition to the partnership and serves as a reference point for resolving any disputes or disagreements that may arise during the course of the partnership.

Importance of a partnership deed

A partnership deed plays a crucial role in establishing the framework of a partnership firm by clearly outlining the roles and responsibilities of each partner. Its importance includes the following:

• It defines the terms of the partnership, helping partners understand their roles, contributions, and obligations.
• It outlines the nature of the business along with the rights, duties, and liabilities of each partner.
• By clearly stating all terms and conditions, it helps prevent misunderstandings and disputes.
• In case of disagreements, the deed serves as a legal reference for resolving issues based on pre-agreed terms.
• It eliminates confusion about the profit and loss sharing ratio among partners.
• The specific roles and responsibilities of each partner are documented, ensuring clarity in operations.
• It includes details about partner remuneration, reducing the likelihood of payment-related conflicts.
• Overall, it promotes the smooth functioning of the firm by having all key arrangements in writing.
• The partnership deed helps in protecting the interests of all partners and ensures the smooth functioning of the partnership business.

Types of partnership deeds

1. General partnership deed: This type of deed is suitable for partnerships where all partners have equal rights and responsibilities.
2. Limited partnership deed: In a limited partnership, there are both general partners with unlimited liability and limited partners with liability restricted to their capital contribution.
3. Partnership deed with sleeping partners: This deed includes provisions for partners who contribute capital but do not actively participate in the management of the business.

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Advantages of Partnership Deed

• Removal of a partner: The Indian Partnership Act does not permit expulsion of a partner by majority. However, if a partnership deed includes specific clauses for removal, it allows partners to lawfully expel a member by following the stated process and notice period.
• Fair profit distribution: Without a deed, profits are assumed to be shared equally. A partnership deed enables profits to be distributed in proportion to each partner’s investment, effort, or role, ensuring fairness.
• Avoiding legal disputes: Legal proceedings can be lengthy and expensive. A partnership deed can specify Alternative Dispute Resolution (ADR) methods like mediation or arbitration to resolve conflicts efficiently.
• Limited liability: By default, all partners share equal liability. The deed can clearly define the liability share of each partner, offering flexibility in financial responsibility.
• Prevention of unwanted dissolution: In the absence of a deed, certain events under the Act can trigger automatic dissolution. A deed allows partners to include clauses that help retain control over whether the firm should continue or dissolve after specific events.

How to Draft a Partnership Deed?

A partnership deed may be created either orally or in writing, but choosing a written agreement is highly recommended. A written deed provides a formal record of the mutual terms agreed upon by all partners, helping to minimise the risk of future disagreements. It also serves as an important document during tax assessments and is necessary for registering the partnership firm officially.

1. The deed should include key clauses that define the partnership's terms and conditions
2. At least 2 partners must be involved in creating the deed
3. The deed should show that all partners agree
4. Avoid unclear clauses and ensure all details are clear and precise
5. Use a non-judicial e-stamp paper worth Rs. 200 or more, depending on the firm's capital
6. All partners must sign each page of the deed

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Partnership deed registration

The partnership deed is registered under the Indian Registration Act, 1908 and plays a crucial role in establishing a legally recognised partnership. To initiate registration, the deed must be printed on non-judicial stamp paper valued at Rs. 200 or higher, depending on the capital contribution of the firm. It should be duly signed by all partners, and each must retain a copy for their records.

Once signed, the deed must be registered with the Sub-Registrar or Registrar Office within the jurisdiction of the partnership firm. Stamp duty applicable for registration varies across states and is determined as per the respective State Stamp Act. Additionally, notarisation of the deed is required to validate the document further. Registering the partnership deed not only formalises the relationship between partners but also strengthens legal standing, particularly in matters involving profit sharing, dispute resolution, and taxation.

Steps to register a Partnership Deed

Here are the essential steps involved in registering a partnership deed to ensure your firm is legally recognised:

Step 1: Draft the partnership deed on non-judicial stamp paper and have it signed by all partners.

Step 2: Schedule an appointment with the Sub-Registrar or Registrar Office. Register and notarise the deed in the presence of witnesses who must also sign the document.

Step 3: Submit the registered deed along with all required documents to the Registrar of Firms for verification.

Step 4: Obtain the official Partnership Firm Registration Certificate from the Registrar of Firms, confirming the firm's legal status.

Unregistered partnership deed

An unregistered partnership deed, according to the Indian Partnership Act of 1932, is a written agreement that is not officially recorded with the Registrar of Firms. It is still valid among partners but has some limitations:

1. It cannot be used as evidence to resolve disputes in court, either between partners or with third parties
2. Partners cannot enforce the terms of the partnership deed against outsiders
3. Partners cannot claim tax benefits or deductions unless the deed is registered
4. During a dispute, partners cannot sue each other or the firm

Documents required for partnership deed registration

• Copy of the partnership deed signed by all partners.
• Application form for partnership registration.
• Proof of address of the partnership firm.
• Identity proof of all partners.
• Payment of registration fees as prescribed by the Registrar of Firms.

Partnership deed contents

When drafting a partnership deed, it is essential to include all relevant provisions and legal aspects. This deed should also outline basic guidelines for future projects and can serve as evidence in case of disputes or legal proceedings. A general partnership deed should contain the following information:

• The name of the firm as agreed upon by all partners
• Names and details of all partners
• The date the business commenced
• Duration of the firm's existence
• Capital contribution from each partner
• Profit-sharing ratio among partners
• Duties, obligations, and powers of each partner
• Salary and commission, if applicable, payable to partners
• Process for admitting or retiring a partner
• Method for calculating goodwill
• Procedures to follow in case of disputes between partners
• Steps to take if a partner becomes insolvent
• Procedures for settling accounts upon dissolution of the firm

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