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A partnership is formed when two or more people with an intention to start a business, share its earnings and losses. A partnership is defined in Section 4 of the Indian Partnership Act 1932 as a “relationship between persons who have decided to share the profits of a business carried on either by all or any of them.” The agreement is referred to as a ‘Partnership Deed’. It must be signed, stamped, and registered by the partners for the partnership deed to be valid. Any changes to the partnership agreement can only be made with the permission of all partners.
What is a Partnership Deed?
A partnership deed is a formal agreement between the partners for the management of the partnership firm’s activities. In other words, the contents of the partnership deed are the written instrument that outlines the parameters of the agreement. Every business can create its partnership agreement in which the business’s goal, capital contribution, profit-sharing ratio, rights, duties, and obligations of the partners are all spelt out.
Key points about a Partnership Deed
- It is a contract.
- It can be either oral or written, and it outlines the terms of the contract.
- It covers the specifics of the business’s goal.
- The ‘Article of Partnership’ is another name for the partnership deed.
Contents of a Partnership Deed
The following are typical contents of a partnership deed that should be included in such documents:
Business’s Name
The name of the Business Firm that will be conducting the business. You can call it whatever you like.
Business Address
The region of the business where it will be managed. If it’s a manufacturing business, an industrial location is preferable, but if it’s a retail store, go to a market where people come to buy. If it’s a service business that provides service at the client’s doorstep, it can be anywhere.
Nature of the Business
The nature of the business that the partners will perform. Rendering services, manufacturing items, acting as a brand distributor, creating a retail store, dealing with wholesale, exporting, or importing commodities are all examples of different types of enterprises.
Partnership Duration
The duration of the partnership, whether it is for a certain amount of time or indefinitely, is, without a doubt, necessary to mention. If the business does not proceed smoothly, this section of the partnership deed can help end it in minutes, or it can be extended or rewritten if they desire to extend it.
Date On Which The Firm Will Be Open For Business
It is an essential component of the deed. If the Business Firm is to be properly registered under state law, the start date of a firm can aid in the management of all obligations and other business operations, such as accounts, costs, payables, and receivables.
Salary Percentage
There are fewer opportunities to remove earnings from a good business. Setting a monthly fixed pay for each stakeholder is the best approach. Salaries may be determined by a variety of factors, including capabilities, capacities, duties, and roles.
Capital and Drawings Interest
It may be debated in a partnership, rather than a sole proprietorship, to charge a profit on the invested cash. For example, the money put into the business might be put into another firm or deposited in a bank to earn a monthly or yearly profit. As a result, depending on the amount and predicted ROI, a few enterprises or shareholders may be able to demand interest.
The Indian Partnership Act, 1932
The Indian Partnership Act was passed in 1932 and went into effect on October 1st of the same year. The old law dealing with partnerships, which was included in Chapter XI of the Indian Contract Act, 1872, was superseded by the current Act. However, the Act does not cover everything. Its purpose is to clarify and reform the law governing partnerships.
Elements of the Indian Partnership Act
The following elements are required to form a ‘Partnership,’ according to Section 4.
- The people who want to be partners should agree.
- The goal of forming a partnership should be to continue doing business.
- The goal of the creative partnership should be to make money and share it.
- The firm’s business should be conducted by all the partners or by any of them acting for all of them, i.e., in the mutual agency.
Provisions of Partnership Act Relevant for Accounting
(i) Profit Sharing Ratio: When a partnership deed is not formed or is silent on profit or loss sharing among the partners, the profits, as well as the losses, are to be divided equally among all partners of the firm, according to the Partnership Act 1932.
(ii) Interest on Capital: If a partnership deed does not exist or if the partnership deed is silent on the topic of interest on partners’ capital, the Partnership Act 1932 states that no interest on partners’ capital would be paid. However, if they agree on this point, they can pay interest on the said capital from the Business Firm’s profits.
(iii) Interest on Partner’s Loan: When there is no partnership deed among the partners, or the partnership deed is mute on the interest on the partner’s loan, the partners are qualified to 6% pa interest on the loan forwarded, under the Partnership Act of 1932.
(iv) Income to Partners: If a partnership deed does not exist or is quiet on the topic of a partner’s wage, the partnership Act of 1932 states that no partner is entitled to a salary.
Conclusion
A partnership deed is a formal requirement created when two people come together and resolve to manage a business together, regardless of whether they make money or lose money. This official document ensures that neither party ends up in a misunderstanding, disagreement, or harassment over time. Partnership Deed, also known as Partnership Agreement, is documented under the Indian Registration Act, 1908, to ensure that it is not destroyed while in the possession of a single individual. Both partners can amend the provisions of the partnership deed at any time. A partnership deed serves as the official document that can impact the final decision made if the partnership firm ends up in court.
