Importance of Partnership Deed in Partnership Firm

The Buyt Desk

A partnership firm is formed among 2 or more people and it comes into existence only when all partners sign the Partnership Deed which has all terms and conditions.

A partnership is a type of business deal where two or more people called partners, come together with an intention of sharing profits from the business they run. A formal agreement is made which states how business is run and all terms and conditions for partners. The partners are co-owners of the business they run with shared responsibility and divide the income the business generates. All these are documented in the partnership deed, the fundamental contract.

What is a Partnership Deed?

For a partnership firm to be formed and functioning, all partners must mutually agree on the ways the business is done. This partnership agreement between two or more individuals is the partnership deed. It should be signed by all partners to initiate the business. The sole intention of this deed is to legally pen down all terms and conditions of the partnership and for partners to clearly understand their roles in smooth running of business. It talks about types of business, capital investment by each partner, retirement of partners, management of firms, profit sharing, debts of organization and many more.

Essential characteristics of Partnership Deed

Partnership Deed is a recorded document containing every detail about the partnership and clauses for future too. Of many details, here are some essential characteristics of this deed:

• The firm name.

• Every partner’s name and address.

• Kind of business.

• The partnership term or duration.

• The capital amount put in by each partner.

• The profit sharing or withdrawals that can be made by each partner.

• Rights of each partner.

• Duties of each partner.

• Remuneration to be given to every partner.

• The goodwill calculation method.

• Each partner’s ratio of sharing profit and loss

Contents of Partnership Deed

While preparing a partnership deed, every legal point should be covered. It should be such that it should not create conflict in future but provide solutions to conflicts and legal procedures. Here are things that should and must be covered in a partnership deed :

• The partnership firm name, as mutually agreed by all partners.

• Every partner’s name and details.

• The date of commencement of business.

• Term or duration of the firm’s existence.

• The capital amount put into business by each partner.

• Profit sharing ratio among the partners.

• Each partner’s duty, obligation and power towards the firm.

• When applicable, the salary and commission to be paid to the partners.

• The process of adding a new partner or retirement of an existing partner.

• The goodwill calculation method.

• The modus operandi when dispute arises among the partners.

• The modus operandi when a partner becomes insolvent.

• The modus operandi for settlement of accounts when a firm dissolves.

Importance of a partnership deed

Here are few points which clearly demonstrate the importance of a partnership deed

• It monitors and manages the responsibilities, rights and liabilities of each partner.

• Avoids misunderstanding and confusion between partners.

• Resolves dispute among the partners.

• Keeps away misunderstanding among partners on profit and loss sharing ratio.

• Every partner’s duty and responsibility is clearly stated.

• Explicitly defines the remuneration of every partner.

• Defines the interest to be paid for capital investment in the business by partners.

• Keeps away tax problems, the tax status confirms that the firm is giving out profits as per accounting practice and acceptable tax to every partner.

• Resolves liability and legal issues among partners.