There can be an oral or written agreement among the partners; however, a written agreement – a Partnership Deed – is always recommended.
Partnership deeds set out the terms and conditions that lay the foundation for working within a partnership in a systematic manner.
In addition to the profit sharing ratio, the partnership deed format includes provisions about interest on capital and drawings of partners, interest on loans, and remuneration. It is the charter document of the partnership firm. It becomes legally binding on all partners of the partnership firm when the partnership deed is registered.
In the partnership deed, what points are listed?
The partnership deed contains the following information
- The firm’s name.
- Business nature and location.
- Information about the partners, including names and addresses
- Each partner’s capital contribution and interest on the capital, if any
- Salaries or commissions allowed to partners
- Partners’ interest on loans to the firm
- Goodwill valuation method
- Partners’ types
- Partner admissions and retirements
- Procedures for accounting and auditing
- Signatories to the firm’s bank account
- Other terms and conditions are agreed upon by all partners.
In the absence of a partnership deed, what happens? This is when the Indian Partnership Act 1932 comes into play. How does the Indian Partnership Act of 1932 work?
The Indian Partnership Act,1932
As a result of the Indian Partnership Act,1932, all partnerships in India were streamlined and provisions were brought into effect that would govern the partnerships registered under the Act. Among other things, it regulates registration, accounting, and so forth.
How does it answer your question, which is-
How does a Partnership deed provide for its provisions?
Suppose you entered into a partnership firm without drafting a partnership deed or a particular provision. However, once you start doing business through this partnership, you realize there are some important terms that are missing, like the profit sharing ratio among the partners, interest on capital and drawings of the partners, interest on their loans, and remuneration. Having no proper discipline or certainty about accounting makes it very difficult to conduct your business. This is where the Indian Partnership Act, 1932 comes in. Provisioning of Partnership Deeds means this. The Indian Partnership Act,1932 will apply in the absence of a partnership deed.
The Indian Partnership Act of 1932 contains the following provisions
- Profit-Sharing Ratio:
- Partners will share profits and losses equally or in the same ratio even if they contribute capital in different amounts if there is no specific profit sharing ratio mentioned.
- Participation in affairs of the firm:
- Every partner has the right to participate in the business’s conduct and to access the books of accounts and other relevant documents.
- Interest on Capital:
- In the absence of a partnership deed, no partner is entitled to interest on their capital
- Loan on Partner’s Loan:
- A partner can receive interest on a loan advanced by him at 6% per annum if the partnership deed does not specify the interest rate.
- Interest on Drawings:
- On drawings, there is no interest to be charged, just as there is no interest on partner’s capital
- Salary to partner:
- If a working partner who is not provided with any provision as to his remuneration in the partnership deed, then it is a right thing that they do enter into a partnership deed and set the terms of salary straight and clear because the Indian Partnership Act,1932 is silent too about the salary to be paid to the partner.
A reconstitution of partnerships is also mentioned in the Indian Partnership Act of 1932, which includes:
- Partner admission
- Partner’s retirement
- Partner’s death
Additionally, it specifies the procedures for dissolving a partnership firm, maintaining books of account, inspecting them, and registering the partnership firm.
Why is Provisioning Important?
The provisioning process is useful when certain important terms determining the operation of the partnership firm are missing. By having something to refer to, you can resolve disputes more easily. As a result, it makes it easier to maintain the proper books of accounts, which in turn helps make the proper financial statements, which can serve as a means of understanding the progress of the partnership firm as they show the profitability position of the business and also protect the partners from any unfairness.
How does a partnership deed get provisioned?
Partnership deeds do not need to be provisioned, just if there is no partnership deed, the partnership deed’s provisions will apply.
How is a partnership deed provisioned?
After deciding to start a partnership firm with your other partner or partners, you proceed to draft your partnership agreement. However, you forget to include certain fundamental terms in your partnership deed. These terms might lead to future conflicts, which is when the Indian Partnership Act,1932 comes into play. As a result, you will be able to conduct your business smoothly and without any hindrances.
In conclusion, the provisions of the Indian Partnership Act, 1932 govern a partnership without a partnership deed or certain conditions in a partnership deed. As a well-defined partnership deed will have a positive effect on your partnership firm’s success, it is also vitally important to set the term of the partnership deed with precision and clarity. In the long run, you will save time, money, and conflicts by doing this now. It is not necessary to do a partnership deed if you haven’t, as the provisioning of a partnership deed as described in this article will protect you.