What is Partnership?
A partnership is a form of business where two or more-person carrying a business or any of them acting for them.
What is a Partnership Deed?
Partnership Deed is the agreement made between two individuals who have agreed to share the profits of a business that has been carried on by all or any of them who was acting for all.
Essential Points of Partnership Deed
- Name and address of the Partners.
- Name and Nature of the firm.
- Capital contribution of each partner.
- Date of commencement.
- Duration/ period.
- The amount of Partnership that may withdraw by each partner.
Advantages of Partnership
There are certain Advantages of Partnership that are:
- Easy to established and start-up.
- Low cost.
- Two or more people.
- Flexible, not rigid.
- Tax Advantages.
- Other advantages.
- No burden of management and risk.
- Combined skill and judgments.
- Dissolution of firm is easy.
Disadvantages of Partnership
- Unlimited Liability.
- Limited source of capital.
- No Independency.
- Foundation on Transfer of Interest.
- Liability after Retirement.
- No separate entity from Partners.
Types of Partnership Deed
There are three types of partnership deed.
- General partnership.
- Limited Partnership.
- Limited Liability Partnership.
General Partnership– the General Partnership involves two or more persons carrying out a business purpose or any of them carrying for all. They share equal rights and responsibilities connecting to the business. An individual partner can bind the entire group in a legal obligation. In General Partnership the concept of Risk and Return follow, here the profits are distributed equally and liability share equally.
General Partnership is further classified into two groups.
- Partnership at will.
- Particular partnerships.
Exception in General Partnership
In the case of Minor as a Partner, the liability of Minor is limited as the amount of his share in the capital. Minor is not personally liable for the firm’s debts.
Limited Partnership involved one general partner with unlimited liability and other partners with limited liability. Limited Partners do not have control over day to day operations of the business and have limited control over the business.
Limited Liability Partnership
In a Limited Liability Partnership, each partner holds liability to the extent of their business investment. At the time of liquidation partner personally not liable to pay firm debts. Limited liability Partnership is not including in the Partnership Act, this includes in Limited Liability Partnership act, 2008.
|Basis||General Partnership||Limited Partnership||Limited Liability Partnership|
|Definition||The General Partnership involves two or more persons carrying out a business purpose or any of them carrying for all. They share equal rights and responsibilities connecting to the business.||Limited Partnership involved one general partner with unlimited liability and other partner with limited liability. Limited Partners do not have control over day to day operations of the business and have limited control over the business.
|In Limited Liability Partnership, each partner holds liability to the extent of their business investment. At the time of liquidation partner personally not liable to pay firm debts|
|Liability||Unlimited liability||One partner has unlimited liability, rest have limited liability to extend to their capital investment in the business.||Limited Liability|
|Act applied||According to Partnership Act 1932||Partnership Act, 1932||According to the Limited Liability Act, 2008|
|Exception||In the case of Minor as a Partner, the liability of Minor is limited as the amount of his share in the capital. Minor is not personally liable for the firm’s debts.||No exception||No exception|
What are the factors required to form a Partnership Deed?
A Partnership Deed is chiefly formed depending on the following few factors, which are:
- 1. A partnership deed is mostly said to be a contract that is made between the partners of the business. This binds each of the partners in a legal relationship between the partners.
- The minimum requisite for forming a partnership is of two members and there is a limitation of 10 in case of banking as well as 20 in case of non-banking business.
- Every partner must have a mutual understanding for carrying out a business.
- The ratio for profits and losses must be decided amongst all the partners well in advance.
- Every partner must maintain the relationship as a principal-agent. Each partner is accountable for the activities that were carried out by the other partners.
Contents of Partnership Deeds
- A standardized partnership deed must comprise the following details:
- Names and Addresses of the firm.
- Business to be carried out by the partners of the company.
- The duration of the partnership firm, relating to whether it is made for a limited period or a specific venture.
- Ratio of sharing profits and losses of firm amongst partners.
- Details of the remuneration, and commission if any, payable towards partners.
- Capital contribution which is going to be made by each partner and the interest on said capital to be paid towards partners.
- Policy relating to the drawings from the firm allowed to each partner as well as interest if any to be paid by partner, to firm on such drawings.
- The rate of interest on Partner’s Capital, Partners’ Loan, as well as Interest, if any, to be charged on drawings.
The duties and obligations of each partner
- Rules that must be followed in case of retirement, death as well as admission of a partner.
- Division of undertaking and responsibility i.e. the duties, powers, and obligations of each partner.
- The method of preparing accounts and arrangements for audit.
- The mode of auditor’s appointment, if any.
- The treatment of loss that rose out of insolvency of one or more partners.
- Settlement of accounts on the dissolution of the partnership firm.
- The methods to be followed regarding the settlement of disputes amongst the partners.
- The other related matter concerning the conduct of business. All the matters affecting the association of partners amongst themselves are usually covered in the partnership deed.
The Partnership Deed created by the partners is required to be made on a stamp paper following the Indian Stamp Act and every partner must have a copy of the partnership deed.
A Copy of the Partnership Deed must also be filed with the Registrar of Firms if the firm is being registered.
Absence of a Partnership Deed:
If the partners do not take up a partnership deed, the following rules shall be made applicable:
- The partners shall equally share the profits and losses of the business.
- Partners shall not get a salary.
- Interest on capital shall not be payable.
- Drawings shall not be chargeable with interest.
- Partners would get 6% p.a. interest on loans to the firm if they mutually consent.
Registration of the Partnership deed in India
Partnerships in India are governed through the Indian Partnership Act, 1932. According to the Partnership Act, the Registration of Partnership Firms is not obligatory and is completely at the discretion of the partners. The Partners might or might not register their Partnership Agreement.