Partnership Deed

2. Partnership Deed

Because partnership is created purely by contract (Section 5), that contract can, in principle, be entirely oral. In practice, an oral agreement invites disputes the moment partners disagree about what was actually agreed — which is exactly why almost every real partnership records its terms in writing, in a document called the Partnership Deed (also called the Articles of Partnership or Partnership Agreement).

A Partnership Deed is not compulsory under the Indian Partnership Act, 1932 — the Act nowhere requires one — but it is the single most important precaution a firm can take, since it becomes the first document referred to whenever a dispute arises between partners.

Typical contents of a Partnership Deed:

1. Name and address of the firm, and the names and addresses of all the partners.
2. Nature of the business to be carried on, and its principal place of business.
3. Date of commencement and duration of the partnership (if fixed).
4. The amount of capital to be contributed by each partner.
5. The profit-sharing ratio among the partners.
6. Whether interest is to be allowed on capital, and whether interest is to be charged on drawings, and at what rate.
7. Whether any partner is entitled to a salary, commission, or other remuneration for extra work done.
8. The duties, powers, and obligations of each partner, and any restrictions on a partner's authority.
9. The method of valuing goodwill on admission, retirement, or death of a partner.
10. Procedure for admission of a new partner, and for retirement, expulsion, or death of an existing partner.
11. The mode of settling accounts on dissolution of the firm.
12. An arbitration clause, providing for how future disputes among partners are to be resolved.

A Partnership Deed, once made in writing, is generally required to be adequately stamped under the Indian Stamp Act; it may also (optionally, as covered in the next section) be filed with the Registrar of Firms as part of registering the firm, though the deed and registration are two distinct things — a firm can have a written deed and still remain unregistered, or (much more rarely) be registered on the strength of an oral agreement reduced to a statement of particulars.

What happens when there is NO Partnership Deed, or the deed is silent on a point? Sections 12 and 13 of the Act step in and supply a set of DEFAULT rules, which apply automatically unless the partners have agreed otherwise:

• Section 13(b) — Profits and losses: partners share profits and losses equally, regardless of how much capital each partner actually contributed, and regardless of how much time or effort each one puts into the business.
• Section 13(a) — No remuneration: no partner is entitled to any salary or other remuneration for taking part in the conduct of the business — the assumption is that a partner works for their share of the profit, not for a separate wage.
• Section 13(c) — No interest on capital: no partner is entitled to interest on the capital they subscribed.
• Section 13(d) — Interest on advances: where a partner makes an ADVANCE (a loan to the firm, over and above their agreed capital), that partner is entitled to interest on it at 6% per annum — this is the one item on which the Act itself fixes a default rate.
• Section 12(a) — Right to take part: every partner has an equal right to take part in the conduct of the business. …