Partnership Firm

What Are The Provisions Of The Partnership Deed?

calendar12 Jan, 2023
timeReading Time: 6 Minutes
What Are The Provisions Of The Partnership Deed?

If you are co-owning a business with one or more people, then you have not formed the business as a private limited or corporative society or any other business form; your business is a partnership. In partnership, two or more people come together to do business, divide their responsibilities and share the profit and losses that the business has generated. In this blog, we will discuss provisions of the Partnership Deed.

The term ‘partnership’ has been elaborated under Section 4 of the Indian Partnership Act of 1932. As per the act, “A partnership is a relationship between the persons who have agreed to share the profits and losses of a business carried on by all the partners/any one of them.” 

Along with defining the term partnership, the act also states that, all the persons who have entered into the partnership will be called as partners of the firm. There are different types of partners as defined under the Act of 1932. They are as follows:

  • Active Partner/Managing Partner
  • Dormant/Sleeping Partner
  • Nominal Partner
  • Partner by Estoppel
  • Partner in Profits Only
  • Minor Partner

For the smooth functioning of a partnership, a firm requires a clear understanding between its partners regarding various aspects of governing the partnership firm. All these aspects are mentioned under the partnership deed, which is signed by all the partners and the two witnesses. A written Partnership Deed plays a very important role for all the partners of the firm, as it helps to settle down any possible dispute in the future with regard to the terms of the partnership. Also, it helps to define the roles of all the partners with their duties and powers.

Partnership Act of 1932 – An Overview

The concept of partnership has been around us for quite some time. Earlier, two or more people used to come together and work for mutual benefits. But today’s modern partnership is totally different from what we use to see 20 years ago.

Prior to 1932, the principles of partnership were elaborated in Section 239 to Section 266 under Chapter XI of the Indian Contract Act of 1872. But with time as the commerce and trade increased in India, and people started adopting partnerships as a form doing business, the government felt the need to enact a separate act, which will only deal with provisions of partnerships in India and therefore the Indian Partnership Act of 1932, was passed by both the houses and got the assent on April 8 1932.

The present Act of 1932 is based on the English Partnership Act. The English Partnership Act of 1890 has been the basis of the law of partnership for most of the countries that have adopted the English common law.

Some of the important sections under the act which are essential to know before we start talking about the partnership deed and its provisions. The sections are as follows:

Under chapter 2- Nature of the partnership

  • Section 2 of the act discusses about the general definition 
  • Section 4 of the act discusses about the Indian partnership, partners of the firm, firm and firm name.
  • Section 6 of the act discusses about the mode for determining the existence of a partnership
  • Section 7 of the act discusses about the partnership at will
  • Section 8 of the act discusses about the particular partnership
  • Section 9 of the act discusses about the general duties of the partner
  • Section 17 of the act discusses about the rights of the partner
  • Section 25 of the act discusses about the liability of the partner for the acts of the firm
  • Section 26 of the act discusses about the liability of firm for wrongful acts of a partner.

Under chapter 5 – Incoming and outgoing partners.

  • Section 31 of the act discusses about the introduction of a partner in the firm 
  • Section 32 of the act discusses about the retirement of a partner from the firm
  • Section 33 of the act discusses about the expulsion of a partner
  • Section 34 of the act discusses about the insolvency of a partner

Under chapter 6 – Dissolution of a firm

  • Section 39 of the act discusses about the dissolution of a firm
  • Section 40 of the act discusses about the dissolution by agreement
  • Section 41 of the act discusses about the compulsory dissolution

Under chapter 7 – Registration of firm

  • Section 57 of the act discusses about the registrar application
  • Section 58 of the act discusses about the application of registration
  • Section 59 of the act discusses about the registration of firm

What is a Partnership Deed?

Partnership Deed or a Partnership Agreement is formed between 2 or more people who come together to do to carry out business activities and share profits and losses. It outlines all the term and conditions of the partnership. The primary purpose of the legal agreement is to provide a clear understanding of the roles of each partner and to ensure the smooth running of the operations of the firm.     

All the partners need to sign the deed, after which it needs to be duly stamped under the Indian Stamp Act of 1889, which makes it a legal document. A written and registered deed also serves as a piece of evidence in a court of law.

Importance of the Partnership Deed

The provisions of the partnership deed plays a very important role in the functioning of a partnership. Here are some of the important advantages of a well-drafted deed:

  • It helps in regulating the liabilities, rights and duties of all partners of the firm;
  • It helps in avoiding all the misunderstandings between the partners since the terms and conditions of the partnership are already mentioned under the deed; 
  • In the case a dispute arises between the partners, it has to be settled as per the terms of the partnership deed;
  • It provides clarity between the partners regarding the profit and loss sharing ratio amongst them;
  • It talks about the role played by each partner in the firm;
  • It also contains the remuneration paid to partners, thereby avoiding any dispute or confusion.

Provisions of a Partnership Deed

For all the partnership firms, it is always advisable to make a partnership deed to save themselves from future conflicts. A partnership deed must include the following provisions in it:

  • Details regarding the description of partners (including age and address);
  • Details regarding the description of the firm;
  • Principal place of business;
  • Nature of business / business activities of the partnership firm;
  • Date of commencement of partnership;
  • Capital contribution by all the members of the firm;
  • Rate of interest on capital;
  • Rate of interest on drawings;
  • Profit sharing ratio agreed upon by the partner of the firm;
  • Interest on loan with interest rate applicable on that loan;
  • Amount of salary or commission drew by each partner of the firm;
  • Whether the partnership firm will dissolve or continue after the death of a partner;
  • Rights and duties of all the partners;
  • Duration of the partnership;
  • Manner in which the accounts will be settled in the case of retirement, death, or dissolution of the firm;
  • Bank account and mode of operation (i.e. whether partners will have a Joint Account or Individual Accounts).

How to Govern a Partnership in the Absence of a Partnership Deed?

Generally all the deed covers all the matters related to the partners of a firm. The Partnership Act will be applied when the partnership deed is silent or absent on any particular issue. In case there is any absence in the partnership agreement, the following provisions of the Indian Partnership Act, 1932 will be applied:

  • Sharing profits and losses: 

If the ratio or the percentage of sharing profits or losses among the partners is not mentioned under the deed, then the provision of the partnership act says that it has to be shared equally by all the partners. This provision has been underlined under Section 13(b) of the Act.

  • Interest On The Capital: 

If the provision of the partnership deed regarding the percentage of interest on capital is silent, then the provision of the act says, no interest on the capital shall be paid to any partner of the firm. This provision has been underlined under Section 13(c) of the Act.

  • Interest On The Drawings:

If the provision of the partnership deed regarding the percentage of interest on amount withdrawn by them is silent, then the provisions of the act says, no interest on such drawing shall be charged from any partner of the firm.

  • Interest On Loan By Partner: 

If the provision of the partnership deed regarding the interest on loan taken by a partner, then the provision of the act says that the interest is allowed only at 6 per cent per annum. This provision has been underlined under Section 13(d) of the Act.

  • Salary/Commission To A Partner: 

If the partnership deed has not mentioned anything regarding the remuneration given to the partners, then as per the provision of the act. No such remuneration should be given to any partner of the firm. This provision has been underlined under Section 13(a) of the Act

Registration of a Partnership Deed

A partnership deed has to be registered under the Indian Registration Act of 1908. The deed needs to be printed on the non-judicial stamp paper with a value of INR 200 or more, based on the capital of the partnership firm. Then it has to sign by all the partners. After the deed is signed, it has to be registered with the Sub-Registrar/ Registrar Office of the jurisdiction where the partnership firm has been located.

The stamp duty for registering a partnership deed varies from one state to another. Also, you must notarize the partnership deed along with its registration. A registered partnership deed works as a piece of evidence in a court of law.

Format of the Deed of a Partnership

The sample format of the partnership deed is as follows:

What-are-the-provisions-of-the-Partnership-Deed.edited

Conclusion

A partnership is a form of relationship that exists between two or more persons for carrying out a business with view to earn profit and share it. A partnership can take different forms to perform different spheres of activities, like: Partnership at will, Partnership for a particular period, Partnership for a particular venture and Limited Liability Partnership. The first three are governed under the Partnership Act of 1932[1], and the last one is governed under the Limited Liability Partnership Act of 2008.

The phrase ‘carrying out a business’, has received a lot of attention from courts, as what amounts to carrying out a business’ means? So merely the existence of the agreement or the deed to set up the partnership without any further implementations will not rise to the partnership. Therefore the partners need to carry out some activities. For the smooth functioning of a partnership, a firm requires a clear understanding between its partners regarding various aspects of governing the partnership firm; therefore, it is advisable to register your partnership deed and save yourself from future disputes.

Read Our Article: Procedure & Reasons For Change In Partnership Deed

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