About | Contents | Necessity | Registration Process | Stamp Duty Charges | Partnership Types | Partnership Features | Required Documents | Absence Of Deed | Conclusion | FAQs
You and your friend/s have a fabulous idea and want to materialise it into a business. You might have decided how to set up the company and notably have discussed your roles in the enterprise, profit sharing ratio, salary to be drawn by each stakeholder, investment liability, and so many other things needed for a business.
Verbal communication is good, but when you are seriously thinking of serious business, you should consider some of the legal aspects required for the smooth functioning of your business while retaining good relations with your friend/s.
You need to bind all the verbal agreements on legal paper and notarise them for smooth sailing of your business and keep everyone’s role in check. This document is, as you guessed correctly, the Partnership Deed.
So without further ado, let’s dive into the details of this topic.
What Is A Partnership Deed?
A partnership deed is a written document comprising all the rules and regulations between individuals planning to start a business. It mentions sharing profits and losses, salary, roles, responsibilities and liabilities, terms for admittance of a new member or exit protocols, etc.
The partnership deed is the legal foundation for any business and acts as a written agreement between the partners.
The partnership deed plays a significant role in any business. It serves as a legal document if any partner/s wishes to settle any disputes in a court.
As per Indian Law, the eligible age for work is a minimum of 18 years, and the same is applicable to the partnership deed too. Any individual of a minimum of 18 years can start a partnership business and register a partnership deed.
Though the partnership deed isn’t mandatory, experts recommend having one to avert disputes and allow transparency in business. The partnership deed requires two or more members to come into existence and mandates all the members involved in the enterprise to sign the agreement.
Let’s now look into what goes into the partnership deed.
Partnership Deed Contents
You must ensure to draft your partnership deed considering all business aspects. It should include all minute details and considerations of any seen and unforeseen events and the action that the company or any individual will take in such circumstances.
There is no fixed standard draft for a partnership deed. You can modify it as required. To help you to give an idea of what roughly goes into the agreement as an outline, we have listed some points present in most of the partnership agreements.
1. Business details
- Name and address of the business
- Names and addresses of all partners
- Nature of the business
2. Duration of partnership
This section will mention the duration of the partnership, the establishment date of business, and the terms and conditions to liquefy the partnership.
3. Contribution of capital by partners
This section details the capital amount, property, services or goods contributed by each partner and what and when they will get in return against these investments.
4. Roles and Responsibilities
This section mentions the roles any partner has to play in the business and, thus, the responsibilities he has to shoulder. In addition, it notes the right of any partner to access what kind of company information etc.
5. Withdrawals of Capital
Here, you can include the terms for withdrawal of invested amount in an event where any partner wants to resign from the enterprise. It may also comprise the applicable interest at a specific rate to the concerned partner.
6. Salary, Remuneration & Commission
As the title suggests, it points to the salary, remuneration or commission paid to the partners and the ratio it needs to get paid.
7. Profit & loss
The profit and Loss section defines the profit and loss sharing percentage and liabilities accordingly. It’s one mandatory clause to refer to in case of any dispute arising at a later stage.
8. Admittance of a new partner or Resigning of an existing partner
A new investor may want to become part of your business. This section mentions the processes, terms and conditions for adding a new partner to the enterprise.
Similarly, if any partner wants to resign as a partner, the process and terms for exiting the business are written for smooth separation.
9. Banking and Partnership Funds
The partners unanimously decide which bank account they need to park their company funds.
A clause that allows all the directors and partners to take loans from financial institutions, banks or money-lenders based on the company’s credibility. It may also state the amount of maximum loan anyone can avail of based on the partner’s contribution and involvement in the company.
11. Liquiefying company
There may be instances when all partners agree on dissolving the company. This section describes the process and guidelines the partners should follow in such an instance.
Why Is A Partnership Deed Necessary?
As mentioned earlier, verbal discussions may be forgotten or misinterpreted. That’s where the need for writing it down gets crucial. Thus, you need to document everything considering all positive and negative aspects of most circumstances and adhering to Indian laws.
Also, the verbal agreement cannot add value to taxation issues nor help in any dispute arising later. In an instance where any partner differs from commitment, there’s no valid proof to check that.
You can’t even open a bank account if you don’t have a partnership deed.
All this leads to the conclusion that a partnership deed is an essential document in any partnership business.
The partnership deed is mandatorily documented on stamp paper to establish it as a legal document.
The need for a partnership deed:
- The partnership deed clarifies the role, responsibility and liability of each partner. The clauses laid down in the document help to keep away the misinterpretations between the partners, giving a crystal clear understanding to all members involved.
- The document mentions the profit and loss ratio, and every member involved strictly follows the code and contributes to the well-being of the establishment.
- The terms and conditions in the partnership deed help resolve any disputes that may arise later.
- The partnership deed mentions each member’s capital funds contributions, making them feel safe and secure as their contribution is present on a legal paper.
- The partnership deed clearly states the payment details of salary, remuneration, commission or interest on the funds the members have invested in the establishment.
- It defines each partner’s roles, responsibilities and liabilities, helping the smooth operation of the business.
- Admittance of a new member and separation of an existing member gets easy as all the procedures are part of the partnership deed.
Now is the time to understand the registration process and its fees for any partnership deed.
Process Of Registration And Fees For Partnership Deed
The partnership deed registration is done with the sub-registrar or magistrate. Then notary notarizes it to have legal standing.
Here are the steps of the registration process.
- Apply to the Registrar of Firms by filling out Form A with all essential details about the business.
- Submit the partnership deed copy duly signed by all members to the sub-registrar.
- Pay affidavit fee, stamp duty charges and any other if required.
- After approval from the registrar, they add the business name to government records.
- Later, collect the incorporation certificate from the authorities.
The registration fees include all partners paying for an affidavit documented on a non-judicial Rs. 10 stamp paper and a court fee of Rs. 3.
Stamp Duty Charges For Partnership Deed
Under Section 46 of the Indian Stamp Act, 1899, you pay stamp duty for any partnership deed. The stamp duty charges are different for each state in India, and the business management has to notarise the partnership deed on a non-judicial stamp paper of a minimum of Rs. 200/-
In Mumbai, the fee for stamp duty is Rs. 500. In Delhi, there is a minimum charge of Rs. 200 as stamp duty on a partnership deed. In Bengaluru, the fee is Rs. 500, while in Kolkata, the partnership deed prints on a stamp paper having a value of Rs. 500.
Article 44 of Schedule I to the Gujarat Stamp Act, 1958, allows charging a stamp duty of 1% on the capital of the business, limiting to a maximum of Rs. 10,000.
You pay these charges to the sub-registrar.
Now, let us understand the different types of partnership categories in the next section.
Types Of Partnerships
The partnership has been categorised based on the nature of the business.
1. General Partnership
In this type of partnership, a minimum of two or more individuals are running the business. One of the partners can also look after the entire management on behalf of other members.
Another feature of this partnership is that all members have equal rights and share the same amount of responsibility and liability. A single partner is entitled to bind the rest of the members by law with this partnership.
The members share all the profits, losses and liabilities equally.
2. Limited Partnership
This type of partnership gives one partner unlimited liability while others can have limited liability. The partners with limited liability have no control over the management and entire business.
3. Limited Liability Partnership (LLP)
This partnership is a mix of public establishment and private enterprise. The partners involved in this business aren’t liable to pay any debts over the enterprise. The liability is limited based on their investment percentage in the company.
Let’s try to understand the partnership features in the next section.
Features Of Partnerships
- A minimum of two members are enough for setting up partnership business.
- In the case of banking business partnerships, the members are limited to a maximum of 10 only. In the case of non-banking, the maximum limit is 20 members only.
- The partnership business requires no minimum capital.
Now, we will look at what documents you require for partnership.
Documents Required For Partnership Deed
- PAN Card and photographs of all partners
- Application form No. 1
- Partnership deed copy duly signed by all members
- PAN Card of the business
- Address proof all members and the business
- Notarised affidavit with all details
An official authority should duly sign all the documents required for partnership deed registration.
What Happens To A Business In The Absence Of A Partnership Deed?
There may be instances when partners decide not to go for the partnership deed and run the business with a mutual understanding. The following rules may apply to any partnership firm as follows.
- There will be equal sharing of profits and losses.
- Partners may have to work without a salary.
- There won’t be any interest payable on the capital invested.
- Any funds withdrawn by any partner will be interest-free.
- If agreed, interest @ 6 p.a. gets paid to the members against the invested amount in the business.
Doing a business is a good idea and sharing it with partners is excellent! You have an advantage with a business partnership as roles and responsibilities can be shared. It will give you an extra edge in gearing up your business to scale it further.
A partnership firm demands a partnership deed, which underscores all functions and activities of every member involved in the business as a partner. This documentation keeps away all misunderstandings and gives clarity and transparency to the smooth operation of the enterprise.
Is it mandatory to have a partnership deed?
No, it is not mandatory, but it is for your financial security, as all the details of your business are documented legally, and each partner is bound by law to perform as mentioned in the document.
Is it allowed to modify any old partnership deed?
Yes, any existing member may resign, or a new member gets added up as a partner. These changes may require the partnership deed to be modified. You can modify it after submitting the details filled in a form to the concerned authority, in this case, the Registrar of Firms.
Is there an alternate name for the partnership deed?
Yes, some call it a partnership agreement also.