Partnership requires mutual trust, confidence and understanding among all the partners. An agreement that contains every aspects and terms that the partners agreed upon before commencing the partnership firm is termed as partnership deed. A partnership deed can either be oral or written. Both the forms of the partnership deed are equally valid in the eyes of law. However, it is always advisable and preferable to have a written agreement in order to avoid any future conflicts and disputes among the partners. The partnership agreement in the written form is termed as Partnership Deed. Thus, a partnership deed can be defined as a document containing the details about the partners and agreement among all the partners of a partnership firm. It includes agreement on profit sharing ratio, salaries, commission of partners, interest on partner’s capital and drawings, interest on loan given or taken by the partners, etc. The deed also defines the rights and responsibilities of all the partners of a firm. Generally, the following details are included in a Partnership Deed.
- Name and addresses of the firm and its principal place of business
- Name and addresses of all the partners
- Nature and type of the business
- The date of commencement of partnership
- Duration of Partnership
- Contribution to capital by each partner
- Profit and sharing ratio
- Rate of interest on capital, drawings and loans
- Rights, duties and responsibilities of each partner
- Salaries, commission, if payable to the partners
- Method of valuation of goodwill
- Rules regarding admission, retirement, death and dissolution of the firm, etc.
- Method of revaluation of assets & liabilities etc.
Importance of Partnership Deed
- A partnership deed is a written partnership agreement among the partners of a partnership firm. Although, the law does not make it compulsory to have a written partnership agreement but it is always preferred to have a agreement in writing due to the following reasons.
- It provides information regarding rights, duties and obligations of each of the partners
- It helps in avoiding the misunderstanding and disagreements among the partners on any issue. This is because a deed contains all the terms and conditions accepted by the partnership at the inception of the partnership, which can be referred to as and when needed.
- It acts as an evidence in the court of law.
- It serves as basis for the formation of a partnership.
Provision in Absence of Partnership Deed/When Partnership Deed is Silent
In absence of partnership deed or when a partnership deed is silent on any fronts, then the following rules should be applied.
Profit Sharing Ratio: In absence of a partnership deed or when the partnership deed does not provide any provisions relating to profit sharing ratio, then profits and losses are shared equally among all the partners irrespective of their capital contributions.
Interest on Capital: In absence of a partnership deed, no interest shall be allowed to any partners on the capital invested by them.
Interest on Drawings: In the absence of a partnership deed, no interest is charged from the partners on the amount of drawings made by them individually.
Interest on Loans or Advances: Sometimes, partners advance loan to their partnership firm. In such a case, the partners (who advanced the loan) are entitled to receive interest on the loan @ 6% per annum. The interest on loan to the partners has to be provided even in the absence of a partnership deed. As interest on loan is an obligation for a partnership firm, so it is liable to pay such interest under every circumstances,irrespective of profits earned or losses incurred by the firm.
Salary or Remunerations to Partners: In absence of a partnership deed, the partners are not entitled to receive any salary or remuneration for participating in the business of the firm.
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