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A Partnership Deed is a formal written agreement between two or more partners of a business firm that outlines the terms and conditions of their partnership. It is a legally binding document that serves as a rulebook for the partners, governing their relationship, rights, and responsibilities throughout the partnership's existence. It also addresses the legal implications in case any partner breaches the terms of the agreement.

What is the Importance of a Partnership Deed?

  1. Legal Protection and Clarity: A partnership deed serves as a legally binding document that outlines the rights, responsibilities, and obligations of each partner. It provides clarity on important aspects such as profit-sharing, decision-making, and dispute resolution. In the absence of a partnership deed, disputes can easily arise and lead to costly legal battles. For example, if a partner wants to exit the partnership or if a dispute arises, the partnership deed can provide clear guidance on how to handle these situations.
  2. Tax Benefits: A well-drafted partnership deed isn't just about legal protection. It can also be your key to significant tax benefits and help avoid double taxation. When a partnership firm earns money, it doesn't pay taxes on that income itself. Instead, the income is passed through to the individual partners, and they pay taxes on their share of the income when they file their personal tax returns. This means the money is only taxed once.
  3. Asset Protection: Partners often invest valuable assets, both monetary and non-monetary, into the partnership. A partnership deed can outline how these assets are managed and protected. This is crucial, as it safeguards individual partners' interests and ensures that assets are used for the benefit of the partnership. For instance, if one partner has contributed a significant amount of capital or assets, the partnership deed can ensure they are appropriately protected and accounted for in case of dissolution or disputes.
  4. Business Continuity: In the event of unforeseen circumstances such as the death or withdrawal of a partner, a partnership deed can help maintain business continuity. It can specify how the partnership will handle such situations, including the buyout of a deceased or departing partner's share, ensuring the business remains operational. Without a partnership deed, the business could be at risk of dissolution, which may not be in the best interests of the remaining partners or the business itself.

These are just a few of the many benefits partners may enjoy if they choose to have a partnership deed drafted. However, it is also important to note that many of the benefits of a partnership deed are only enjoyed if the deed is registered.

Types of Partnership Deeds

  1. General Partnership Deed: A general partnership deed is the most common type of partnership deed. It is a legally binding agreement between two or more partners who agree to share profits and losses in a business venture. In a general partnership, all partners have unlimited liability, which means that they are personally responsible for the debts of the partnership. General partnership deeds are typically used by small businesses where the partners trust each other and want to have equal control over the business. For example: Persons A and B, both entrepreneurs, decide to collaborate on a new business venture. They create their partnership by signing a general partnership deed that outlines their respective roles, responsibilities, and profit-sharing arrangements. In the event of any legal claims against the partnership, both Persons A and B would be personally liable for any damages suffered.
  2. Limited Liability Partnership (LLP) Deed: A limited liability partnership (LLP) deed is a type of partnership deed that provides limited liability to the partners. This means that the partners are not personally responsible for the debts of the partnership beyond their investment. LLPs are typically used by businesses where the partners need to raise capital from outside investors or where there is a high risk of liability. For example: A group of investors, Persons A, B, and C, pool their resources to establish a software development company. They form an LLP and sign an LLP deed that grants them limited liability as partners. This means that if the company faces legal action, the investors' personal assets are protected from the risks associated with the partnership.
  3. Limited Partnership Deed: A limited partnership deed is a type of partnership deed that has two types of partners: general partners and limited partners. General partners have unlimited liability, while limited partners have limited liability up to the amount of their investment in the partnership. Limited partnerships are typically used by businesses that need to raise capital from outside investors, but where the investors do not want to be actively involved in the management of the business. For example: A real estate developer, Person F, seeks additional funding for an ambitious project. They attract two investors, Persons A and B, who are willing to contribute capital but prefer not to actively participate in the project's daily management. The parties enter into a limited partnership deed, designating Person F as the general partner and Persons A and B as limited partners. The limited partners' liability is restricted to the amount of their respective investments in the project.

In addition to the three main types of partnership deeds described above, there are a number of other types of partnership deeds that may be used in specific circumstances. These include:

  • Joint venture deeds: Joint venture deeds are used to create partnerships between two or more businesses for a specific project or purpose. For example: Persons J and K, both business owners, decide to collaborate on a large-scale construction project. They sign a joint venture deed that outlines their respective contributions, responsibilities, and profit-sharing arrangements. The joint venture will be dissolved upon completion of the project.
  • Silent partnership deeds: Silent partnership deeds are used to create partnerships where one or more of the partners do not want to be publicly known as partners in the business. For example: Person M, a successful entrepreneur, seeks financial support for a new business venture. They attract Person N, a wealthy individual who prefers to remain anonymous. The parties enter into a silent partnership deed, making Person M the general partner and Person N the silent partner. Person N's identity will not be disclosed to the public, and their involvement will be kept confidential.

Crucial Clauses to Add in Your Partnership Deed

In addition to the boilerplate clauses in a partnership deed, it is important to include the following elements and components to ensure that your partnership deed is well-drafted, valid, and is well prepared in case of any unforeseen circumstances

  1. Termination and Dissolution: Clearly outline the circumstances under which the partnership can be ended or dissolved. This includes voluntary dissolution by partners, as well as procedures for involuntary dissolution due to unexpected events.
  2. Major Unforeseeable Events Clause: Include a major unforeseeable events clause that outlines how the partnership will deal with unexpected, uncontrollable events like financial emergencies, natural disasters, or, pandemics. Also, designate an emergency decision-making process in case swift decisions are needed to address unforeseen events.
  3. Insurance Provisions: Specify the types of insurance coverage the partnership will maintain, such as business interruption insurance, liability insurance, and Professional Liability Insurance. Outline how insurance proceeds will be utilized in various scenarios.
  4. Technology and Data Protection: If your partnership involves technology or data, establish provisions for cybersecurity, data protection, and disaster recovery plans to ensure the continuity of operations.
  5. Public Relations and Communication: Describe how the partnership will manage public relations and communications in the event of a crisis or unexpected situation, including who is authorized to speak on behalf of the partnership.
  6. Emergency Funds: Consider establishing a fund to cover unexpected expenses or losses during emergencies.
  7. Partnership Governance During Crisis: Determine how partnership governance may change during a crisis, including delegation of authority, decision-making, and emergency meetings.
  8. Succession Planning: In the case of a partner's death or inability to participate, establish a clear succession plan, specifying who will take over their responsibilities and share.

Common Mistakes to Avoid While Drafting a Partnership Deed

  1. Not clearly defining the partnership's purpose and goals: The partnership deed should clearly define the partnership's purpose and goals, as well as the activities that the partnership will undertake. This will help to ensure that all partners are aligned on the direction of the partnership and that the partnership is operating within its scope of authority.
  2. Not adequately addressing the admission and exit of partners: The partnership deed should outline the process for admitting new partners to the partnership and for partners to retire or leave the partnership. This will help to avoid disputes and uncertainty in the event of a partner change.
  3. Not addressing the management of the partnership: The partnership deed should outline the management structure of the partnership, including the roles and responsibilities of each partner, the decision-making process, and the dispute resolution mechanism. This will help to ensure that the partnership is managed efficiently and effectively.
  4. Not adequately addressing financial matters: The partnership deed should outline the partnership's financial structure, including how capital contributions will be made, how profits and losses will be shared, and how the partnership's assets and liabilities will be managed. This will help to avoid disputes and ensure that the partnership's finances are managed in a safe and responsible manner.
  5. Using a generic partnership deed template: Generic partnership deed templates may not be tailored to the specific needs of your business and partnership. It is important to have a partnership deed drafted by a qualified lawyer to ensure that it meets your specific requirements and that it is legally enforceable.
  6. Using outdated language: The language used in the partnership deed should be clear, concise, and up-to-date. Avoid using legally technical words or outdated terms that may not be easily understood by all partners.
  7. Failing to update the partnership deed to reflect changes in circumstances: The partnership deed should be reviewed and updated regularly to reflect changes in the partnership's circumstances, such as the admission of new partners, the retirement of partners, or changes to the partnership's business activities. This will help to ensure that the partnership deed remains accurate and enforceable.

By avoiding these common mistakes and following the tips above, you can help to ensure that your partnership deed is well-drafted and that it protects the interests of all partners.

Additional tips for drafting a well-drafted partnership deed

  1. Consider the specific needs of your business and partnership: The partnership deed should be tailored to the specific needs of your business and partnership. This includes taking into account the type of business, the number of partners, and the unique risks and challenges that your business faces.
  2. Seek legal advice: It is important to have a partnership deed drafted by a qualified lawyer. This will ensure that the deed meets all legal requirements and that it is enforceable in a court of law.
  3. Get feedback from all partners: The partnership deed should be reviewed and approved by all partners before it is finalized. This will help to ensure that all partners are on the same page and that their interests are protected.

Law Governing Partnership Firms in India

A partnership deed or a partnership firm in India is governed under the Partnership Act of 1932. It covers all rules and regulations that must be taken into consideration while drafting and registering a partnership firm. It is applicable to all parts of India except Jammu and Kashmir. This law has been broken down and the key points are detailed below:

1. Formation

  • Members of a Hindu Undivided Family in a family business aren't considered partners.
  • If partners don't decide on how long their partnership will last or how it will end, it's a "partnership-at-will." This means that the decision to dissolve can be made at any time depending on the terms of the agreement.
  • Partnerships can be formed for specific ventures or undertakings, demonstrating flexibility in collaborative work. This means that partnerships can be formed for a specific project for a specific term and can be dissolved after that the objective has been complete.

2. Imposing Restrictions

  • Partners can limit each other from doing business outside the firm.

3. Implied Authority of Partners

  • The power of a partner to represent the firm is called "implied authority."
  • However, there are some limits to this authority. For instance, a partner cannot resolve disagreements through arbitration or perform certain transactions, such as transferring property on behalf of the firm.

4. Firm’s Liability After Partner’s Death

  • Using the deceased partner’s or firm's name doesn't automatically make their legal representative responsible for post-death actions. Therefore it is important that your partnership deed includes clauses specific to this case.

5. Rights of Transferee of a Partner’s Interest

  • Transferees get a share of profits but can't actively join business decisions.
  • If the firm dissolves, transferees can claim a share of the firm's stuff.
  1. Minor as Partner
  • Minors can't be full partners but can get benefits with everyone's agreement.
  • Their share is responsible for the firm's actions, but the minor isn't personally responsible.
  • Minors can't sue partners for an account or payment unless they're leaving the firm.

7. Introduction of a Partner

  • New partners need everyone's approval.
  • Newly introduced partners aren't responsible for the firm's actions before they join.

8. Retirement of a Partner

  • A partner can retire with everyone's agreement, by following a plan, or in a partnership-at-will, by telling everyone in writing.
  • A retiring partner's liability to others for actions before retirement can end through agreements.

9. Removal of a Partner

  • Partners can't kick out a partner unless it's in the contract and done in good faith.

10. Bankruptcy of a Partner

  • If a partner is declared bankrupt, they stop being a partner, even if the firm doesn't dissolve.

Stamp Duty Required on Partnership Deed

State/UTStamp Duty Calculation Rules
Andhra PradeshRs. 100 for capital Rs. 5,000; Rs. 500 in other cases
Arunachal PradeshCapital up to Rs. 1,000 – Rs. 30; Other cases – Rs. 100
AssamCapital up to Rs. 1,000 – Rs. 20; Above Rs. 1,000 – Rs. 100
BiharIf capital disclosed: 2.5%, Max – Rs. 10,000; If Capital Not Disclosed - Rs. 10,000
ChhattisgarhCapital up to Rs. 50K – Rs. 1,000; More than Rs. 50K – 2%, Max = Rs. 5,000
Delhi1% of Capital, Min - Rs. 200, Max - Rs. 5,000
GoaCapital less than Rs. 50K – Rs. 500; Every additional cap of Rs. 50K – Add Rs. 500, Max – Rs. 5,000
GujaratRs. 1 for every Rs. 100 of capital or part thereof, Max- Rs. 10,000
HaryanaRs. 1,000
Himachal PradeshRs. 100
Jammu & KashmirCapital up to Rs. 50K – Rs. 1,000; Exceeding Rs. 50K – 2%
JharkhandIf capital disclosed: 2.5%, Max – Rs. 10,000; If Capital Not Disclosed - Rs. 10,000
KarnatakaRs. 2,000
KeralaFlat Rs. 5,000 at all Capital Levels
Madhya PradeshMin Rs. 2,000, Max Rs. 10,000, Standard Rate @ 2% of Capital
MaharashtraCapital up to Rs. 50,000 – Rs. 500; Exceeding Rs. 50,000 – 1% (Max Rs. 15,000)
ManipurRs. 100
MeghalayaRs. 100
MizoramRs. 100
NagalandRs. 100
OrissaCapital up to Rs. 500 – Rs. 50; Other Cases – Rs. 2,000
PunjabCapital up to Rs. 500 – Rs. 4; Other Cases – Rs. 1,000
RajasthanFor Every Rs. 50,000 – Rs. 2,000; Max Rs. 10,000
SikkimRs. 100
Tamil NaduCapital up to Rs. 500 – Rs. 50; In any other case – Rs. 3,000
TelanganaRs. 100 for capital up to Rs. 5,000; Rs. 300 in all other cases
TripuraRs. 100
Uttar PradeshRs. 750
UttarakhandRs. 750
West BengalRs. 150

Frequently Asked Questions

The minimum age to become a partner is 18 years at the time of registration.