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To understand the partnership deed, both the buyer and the owner must acknowledge its existence. When initiating a business deal involving more than two partners, they should outline their shares of profit and losses in a written contract, also known as a partnership deed or agreement. The collaboration of these business partners agreed upon by the partnership deed is often referred to as a partnership firm.
Having a partnership deed helps partners fulfill their legal responsibilities towards the firm. Partnership deeds do not require registration and can be utilized in any way.
Benefits of a well-constructed partnership deed:
- It adjusts and balances the privileges, duties, and responsibilities of all partners.
- It helps prevent confusion and misinterpretation between partners as all clauses of the alliance are pre-contracted.
- It aids in settling disputes between associates by referring to the points mentioned in the deed.
- It clarifies uncertainties in terms of profit and loss ratios between partners.
- It delineates the exact job roles, with each partner having a clear set of tasks.
- Partnership deeds contain articles that simplify partner salaries (remuneration) and the interests for partners who invested capital in the business.
It is advisable to have a well-drafted partnership deed instead of relying on oral contracts.
Different Types of Partnership Deeds and Their Characteristics
General Partnership (GP)
- General partnerships can be easily established.
- No state filing is required initially; they can be created once business activities commence.
- Operational costs are low, and there's no need for formation filing fees, state fees, or franchise tax.
- Includes business licenses and permissions necessary for business operations.
- Requires fewer ongoing requirements as annual meetings are not necessary.
- General Partnership Agreements define partnership management, partner roles, termination clauses, and other important aspects.
- Helps keep individual assets and business assets separate.
Limited Partnership (LP)
- General partners have unlimited liability.
- Limited partnerships require one business partner to have unlimited liability, who is also the general partner(s).
- Limited partners have restricted liabilities towards their personal assets, which cannot be used for debts.
- The liability amount is limited for investments in limited partnerships.
- Management does not include limited partners; general partners monitor daily operations.
- Projects are typically short term. Limited partnerships involve specialized businesses like films, real estate planning, and family estates.
Limited Liability Partnership (LLP)
- Business services are professional. Limited liability partnerships are created by specific specialized service businesses, including attorneys, accountants, doctors, architects, and other professionals.
- Protection of personal assets. Personal assets under LLP cannot be used to fulfill business obligations and responsibilities. However, LLP does not protect business partners from personal liabilities. If partners are found guilty of personal malpractices, LLP cannot help in reducing the liabilities.
Advantages and Benefits of Partnership Firms
- Easy creation process
- Access to a large number of resources
- Enhanced decision-making through collective efforts
- Highly flexible business operations
- Shared risk, leading to lower individual risk
- Protection of each partner’s interests
Key Sections of the Partnership Deed
Any well-structured partnership deed should include the following clauses, as they are crucial for the partnership firm:
- Names and addresses of the partnership firm along with its primary business
- Names and addresses of all business partners
- Capital amount contributed by each partner
- The firm’s accounting period
- Date of partnership establishment
- Regulations for operation of bank accounts
- Profit and loss sharing percentages
- Interest rates on principal amount, loans, etc.
- Appointment of auditors (if any)
- Wages, commissions, outstanding payments to partners
- Rights, responsibilities, and obligations of each partner
- Settlement of losses in case of partner bankruptcy
- Account settlement upon firm closure
- Dispute resolution process among partners
- Guidelines for partner admission, retirement, demise, and business conduct matters
- Typically, all matters concerning partner relationships are included in partnership deeds.
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Frequently Asked Questions (FAQs)
A partnership agreement is not registered in the court of law as it is an agreement between the partners. However, a partnership deed is registered is registered in the court of law and it is a written agreement between the partners.
A partnership deed is the bible of the partnership firm. Just like a memorandum and articles of association in companies, a partnership has a partnership deed. It is a legal document as it states everything that concerns the partnership firm. It says the nature, purpose, the date of commencement of the business and many more information relating to a partnership firm.
The Indian Partnership Act, 1932, governs the partnership firms. It states that a relation between persons who have agreed to share profits of the business carried on by all or any of them acting for all.