Provision of Partnership Act in the Absence of Partnership Deed

The partnership form of business in India is regulated by the Indian Partnership Act of 1932. The law describes a partner’s rights, duties, liabilities, and powers in several sections. However, these provisions are not necessarily binding on the partners. Any contrary provisions can be made by the partners.

Partnership Deed

According to the Act, partners may define their contractual relationships however they see fit, even if those terms contradict the act. Such terms can be decided either verbally or in writing. In very simple terms, partnership deeds are contracts between partners of a business. The agreement specifies the nature of the partnership, the duties and rights of each partner, their liabilities, and the manner in which profits and losses of the partnership will be divided.

Provision of Partnership Act in the Absence of Partnership Deed

In the absence of a partnership deed, the following accounting rules apply:

A partnership deed includes all matters regarding the partners’ mutual relationships. The accounting shall be conducted in accordance with the following provisions of the Indian Partnership Act of 1932, in the absence of an agreement.

1. Interest on Capital: Partners cannot earn interest on their capital. When there is a profit, interest is only paid if it is allowed by the partnership agreement. Interest is not paid in case of loss.
2. Interest on Drawings: The partners will not be charged interest on drawings they make.
3. Salary/ Commission to Partner: Unless otherwise provided in the partnership agreement, partners are not entitled to salary/ commission.
4. Interest on Loan: Each of the firm’s partners is entitled to six per cent interest on advancing money to the firm (as opposed to just his share capital).
5. Profit-sharing Ratio: Every partner of the firm receives an equal share of the profits regardless of how much capital they contribute.

Features of Partnership

a) Agreement

An agreement between partners brings a partnership into existence. Oral or written agreements can be made between partners. However, for future disputes to be avoided, agreements should be written down. 

b) Registration 

Partner firms are not required to register. On the basis of an application submitted by the firm, the registrar enters the firm’s name into its register.

c) Membership Numbers 

According to law, the partnership firm must have a minimum of two partners and a maximum of fifty members. There can be no more than ten partners in a banking firm.

d) Unlimited Liability 

Partners are not liable for anything in the case of LLP. In other cases, Partner assets may be used to repay the outsiders’ debts if necessary.

e) Relation between the Partners 

Every partner has the right to conduct business for the firm individually or collectively on behalf of all partners. All partners are agents and principals in the firm.

f) Profit Sharing Ratio 

Without any agreement to the contrary, profits and losses are divided equally.

g) Management 

Managing the firm is open to all partners equally. Furthermore, they each share responsibility for the firm’s activities jointly and severally.

Partnering over forming a Company has its Advantages

An agreement between several persons can create a partnership. There are many formalities that must be completed before a company can be formed.

1. It is up to the partners to regulate their affairs. 
2. It is simple to dissolve a partnership by simply signing an agreement, but this is not the case for a company, which has to follow a set of procedures in order to dissolve.
3. Partnership firms are incentivized to make a profit since all profits are pocketed by the partners. But not so for companies.
4. In a partnership, each partner is known as a partner, and collectively they are the partners. There is no separate legal personality for a partnership firm. However, a company has its own legal personality.
5. Whenever a partnership firm dissolves, all of its partners cease to be partners, such as when one partner dies or becomes insolvent. Unlike people, companies are not affected by the coming and going of their members.
6. Members of a company are limited in their responsibility, while partners are unlimited in their responsibility.

Conclusion

The following provisions will still apply in the absence of a partnership deed. No matter how much capital a partner contributes, profits and losses are equally shared. Participation in the conduct of the features of partnership and access to all of the company’s records are the rights of each partner. For any work done, the partners are not entitled to any salary or interest on capital. In the case of loans advanced by partners, they will be allowed to receive 6% interest per annum. Drawings will not be charged interest.