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Importance of partnership deed in simple words

What is a partnership?

Before moving to the importance of partnership deed, let’s discuss partnership first.

A partnership is a mutual agreement between two or more parties having similar interests. In this arrangement, the duties and earning are discussed and negotiated upon. In simple words, A partnership is a form of business where two or more people share ownership, as well as the responsibility for managing the company and the income or losses.

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What is a partnership deed?

A partnership deed, also known as a partnership agreement is a document stating the agreement between two individuals or firms. It safeguards the interest of both parties through mutual discussion and agreement of profits, losses, capital, etc. It is a legal and notarized document under the Indian Partnership Act,1932. It provides clarity of the role that each member needs to play in the partnership hence eliminating the chance of disagreements and allowing the firm to function smoothly.

In case you are looking to create a partnership deed, you can create it here.

What is the importance of Partnership Deed?

Partnership deeds play a vital role in a well-functioning partnership, and there is a huge importance of partnership deed. Here is why:

  • It helps to secure an individual’s liabilities and rights as it is a legal document outlined by law. 
  • It helps settle any quarrels that may take place in the future.
  • The terms and conditions of the partnership are laid out in the deed for future references. 
  • It helps in identifying the roles of the members hence permitting proper functioning. 
  • It can be dissolved and edited as per the wishes of all parties after mutually agreeing on it.

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What are the advantages and disadvantages of a partnership deed?

Advantages:

  • A partnership deed is a bonafide document that states the motives of both the partners and provides a clear judgment. 
  • It helps in the resolution of any disagreement that may take place in the future by providing maximum satisfaction to both parties. 
  • It is a legal document and hence helps in protecting the rights of the partners. 
  • It helps in laying out a clear-cut structure and carrying out effective communication with clarity.
  • It is a mutual agreement, hence it provides satisfaction to all the parties.

Disadvantages:

While along with advantages/ importance of partnership deed, this model also carries a number of important disadvantages.

  • Disagreements and disputes in a business may create friction and an unwanted working environment.
  • The improper functioning of the firm due to this friction can lead to the endurance of heavy losses. 
  • The dissolution of the partnership can be a complicated procedure in case there was a  time period mentioned in the deed. 
  • The source of capital is limited.

What are the contents of a partnership deed?

A complete partnership deed may have the following contents:

  • Name and details of an individual or firm.
  • Date of commencement of the deed. 
  • The time period of the partnership. 
  • The profit and loss sharing ratio.
  • Distribution of power, liability, and duties. 
  • Settlement of disputes in the future. 
  • Settlement of assets after the dissolution of the partnership deed. 
  • Determining the calculation of the goodwill.
  • Capital contribution by each partner.
  • The salaries of the partners.
  • Rules for the addition of a new partner.

See this also: Documents Required for Registration of a Partnership Deed

Conclusion

In conclusion, a partnership deed is what allows the smooth functioning of a firm run by two or more parties. It is a legal and notarized document hence it protects the partners and their rights. It helps solve disputes that may take place in the future by providing maximum satisfaction to all parties. A partnership deed is a key ingredient to a smooth sailing partnership It also brings out the agenda and motives. A mutually agreed on and signed deed also encourages clear cut communication that plays an important role in a partnership.

Through time, the deed may be edited and changed after the parties mutually agree to do so. This can be done by forming a draft of the edited version of the deed and having it signed by all the partners under the Stamp Act. It can be legally validated by registering it with the Registrar of Firms. 

I hope, now you are very well known with the importance of partnership deed.

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