How to prepare a partnership deed?

A partnership deed is a legal document that gives powers to partners to conduct, take part, and operate the partnership business. After reading this article you will have a clear idea of what is partnership deed, the importance of professional partnership deed drafting, etc.

What is a partnership deed?

A partnership business is formed when there is an intention to start the business by a minimum of two willing persons to earn profits, the partnership may be in oral or in written form, but a partnership business carried out in oral terms does not have legal strength to operate a business.

To form a partnership firm with legal validity for all purposes it is essential to have the terms of the partnership in a written document, the document which contains the terms of the partnership is called the partnership deed and is generally called a partnership agreement.

Features of partnership deed

• The date of formation in the partnership deed is the primary source to establish the date of formation of the partnership firm, the date provided in the partnership deed is considered the date of formation of the partnership firm when there is a contradiction in the date of formation of the partnership firm.
• It gives power to the partners to legally represent the firm in the conduct of business
• Serves as a by-laws and rules document, for the operation of the partnership.
• A partnership deed gives the right to the partners to claim a share of their profits from the partnership firm.
• In case of disputes, the settlement process and the manner of financial calculation will be made as per the partnership deed.
• The partnership deed can be amended when all the partners accept the changes mentioned in the partnership amendment deed.

How to prepare a partnership deed?

A partnership deed is prepared as per the provision of the Indian Partnership Act 1932 as amended by the state laws, the clauses and rules in the partnership act cannot override the Indian Partnership Act 1932 and other business laws.

While a partnership deed with additional customized rules and regulations care should be given to ensure the rules and regulations are not against the partnership act and other rules.

As per the Tamil Nadu stamp duty rules the minimum stamp duty is Rs.1000 and where capital is mentioned in the partnership deed the fees shall be 1 % of the investment in the partnership firm.

Professional partnership deed drafting consultant or auditor should draft the partnership deed to comply with legal requirements, points required to claim amounts paid to the partner as expenses when filing income tax returns  , and the appropriate legal terminology, customized rules and regulations can be only drafted by the well experienced partnership registration consultant.

The original partnership deed should not be notarized.

What are the contents of the partnership deed?

Contents of the partnership deed are drafted in paragraphs, each paragraph is called a clause, and these clauses define the structure of the firm.

Date of formation – The date of formation of the partnership deed is the date of execution of the partnership deed and the date on which the partnership firm is formed. The date of formation of the partnership firm should not be before the date of stamp papers. The date of formation of the partnership firm cannot be amended later.

Detail of partners – The parties clause in the partnership deed provides the details regarding the name age, father’s name of the partner, and the address of the partners at the time of commencement of the partnership firm. In the case of the married woman, the husband’s name should not be added instead of the father’s name to comply with legal documentation guidelines.

Object clause – The object clause in the partnership should describe the nature of the business, services, and products the firm is going to deal with. This is important to describe who are we, to our customers, suppliers, and other persons who are connected to the business.

Name clause –   The name clause in the partnership deed provides the name of the firm with which the partnership firm is formed.

Registered address – This clause mentions the registered address of the business, while deciding on the registered address factors such as supporting documents for the registered address, and GST registration business address documentation, should be considered.

Capital Clause – The capital clause of the partnership firm is important to mention the exact amount of the capital, where the amount of capital cannot be mentioned at the beginning, terms such as capital in proportion to profit sharing ratio can be added. Interest on capital and additional capital shall be added as mandatory points to claim interest paid to partners as expenses while filing income tax return.

Profit sharing ratio – The profit sharing ratio should be mentioned as a percentage to each partner and the total percentage of profits added together should be exactly equal to 100 %.

Remuneration – The salary or remuneration payable to the partner will be related to activity entrusted to the partner, in cases where one partner has only invested and does not take part in business operations, remuneration shall not be paid to such partner. In simple terms, it is a salary payable to the working partner.

Mode of operation of bank accounts – The mode of operation of bank accounts may be by any one partner or shall be authorized by all the partners, we suggest that the operation of bank accounts should be authorized by all the partners. Based on the mode of operation cheques and other documents are required to be signed by the concerned partner.

Admission and retirement of the partner –   Rules regarding admission of the partner, and retirement of the partner, should be clearly mentioned in this clause. The minimum notice period and all other points shall be carefully added to avoid future disputes.

Transfer of partnership rights – The rights and the stake in the partnership firm are not freely transferable, the share of the partners should be first offered to the existing partner, when the existing partner fails to subscribe then the partnership rights can be transferred to the third party.

Accounting – The manner of maintaining the books of accounts, list of documents required, manner of authorization of payments, limits of expenses, etc shall be specified with proper rules.

Dispute resolution –  Generally rules regarding dispute resolution shall be added in the partnership deed, the manner of apportionment of assets, profits, waiting period to withdraw investment, and accounting process shall be clearly drafted for smooth closure of disputes between partners.