A partnership is a unique form of business in which partners work together to achieve common goals. Due to this feature of partnerships, partners are allowed to decide the terms of their relationship with each other. The documents which they do so are called partnership deeds.
Relationship Between Partners
The Indian Partnership Act, 1932 governs partnership forms of businesses in India. This law contains several provisions defining rights, duties, liabilities, and powers of partners. These provisions, however, are not always binding on them. Partners are free to bind themselves with contrary provisions.
Most provisions of the Partnership Act are subject to a contract to the contrary. This means that if partners have agreed to contrary understandings, they will prevail over the Act. For example, although payment of salary to partners is prohibited by the Act, partners can still draw a salary if they mutually agree.
Know more about Capital Accounts: Fixed and Fluctuating
Browse more Topics under Introduction To Partnership Accounting
- Definition and Features of Partnership
- Limited Liability Partnership
- Profit and Loss Appropriation Account
- Fixed and Fluctuating Capital
As explained above, partners are free to define the terms of their relationships, even if they go contrary to the Act in certain cases. They can either decide on such terms with an oral agreement or a written one.
Partnership deeds, in very simple words, are an agreement between partners of a firm. This agreement defines details like the nature of the firm, duties, and rights of partners, their liabilities and the ratio in which they will divide profits or losses of the firm.
Although the drafting of partnership deeds is not compulsory, it is always advised to do so. This helps in ensuring that all terms agreed by partners exist in written form on paper. Doing so can reduce disputes between partners and govern their functioning better.
Unlike similar documents like articles of association of companies, partnership deeds need not be registered mandatorily. However, registration can ensure the prevention of legal challenges to its validity when disputes arise. An ideal partnership deed is comprehensive and clear about all details pertaining to the functioning of a firm. It should not contain any ambiguities.
Contents of Partnership Deeds
Although there is no specific format prescribed for drafting a partnership deed, a typical deed contains the below mentioned clauses.
- The name of the firm
- Name and details of all partners
- Date of commencement of business
- Duration of the firm’s existence
- Capital contributed by each partner
- Profit/loss sharing ratio
- Interest on capital payable to partners
- The extent of borrowings each partner can draw
- Salary payable to partners, if any
- The procedure of admission or retirement of a partner
- The method used for calculating goodwill
- Preparation of accounts of the firm
- Mode of settlement of dues with a deceased partner’s executors
- The procedure followed in case disputes arise between partners
What is a Limited Liability Partnership (LLP)?
Absence of a Partnership Deed
In case partners do not adopt a partnership deed, the following rules will apply:
- The partners will share profits and losses equally.
- Partners will not get a salary.
- Interest on capital will not be payable.
- Drawings will not be chargeable with interest.
- Partners will get 6% p.a. interest on loans to the firm if they mutually agree.
Solved Question for You
Question: Determine which of the following items are not typically present in a partnership deed
- Profit-sharing ratio
- A provision specifying the existence of a principal-agency relationship between partners
- The exact nature of their business
- Rights of the partners
- The share of their capital
- Details of their office
Answer: All items under options (i), (iv) and (v) and included in a partnership deed. The rest of them are not for the following reasons:
ii) Principal-agency relationship exists between partners by default; they need not mention it specifically.
iii) Partners need not describe the exact nature of their business.
vi) Details of the office might not be important to govern the relationship between partners.