How to Create a Partnership Deed: A Step-by-Step Guide
A partnership deed is a legal document that outlines the rights, responsibilities, and obligations of each partner in a partnership. It plays a crucial role in defining the terms of the partnership and helps in avoiding misunderstandings in the future. Creating a well-drafted partnership deed is essential for smooth business operations and can protect both the business and its partners in case of disputes.
In this blog, we’ll discuss how to create a partnership deed, the essential clauses that should be included, and why it’s important for any partnership business.
What is a Partnership Deed?
A partnership deed is a written agreement between two or more individuals who wish to start a partnership business. It defines the nature of the business, the terms of the partnership, the distribution of profits and losses, and the roles and responsibilities of each partner.
Why Do You Need a Partnership Deed?
A partnership deed is crucial for the following reasons:
Clarity on Roles and Responsibilities: It clearly defines the duties of each partner, reducing the scope for conflicts.
Profit and Loss Sharing: It specifies how profits and losses will be shared among partners.
Legal Protection: It serves as a legal document in case of disputes or dissolution of the partnership.
Tax Benefits: Partnerships registered with a partnership deed can enjoy specific tax benefits.
Steps to Create a Partnership Deed
Step 1: Choose the Type of Partnership
The first step is to decide on the type of partnership. In India, the two main types of partnerships are:
General Partnership: All partners have equal responsibility for managing the business and share liability for the debts.
Limited Liability Partnership (LLP): In this type, partners have limited liabilities, meaning they are not personally responsible for the debts of the business.
Once you have decided on the type of partnership, you can proceed with drafting the deed.
Step 2: Decide the Name of the Partnership Firm
Choosing the name of your partnership firm is a critical step. Ensure that the name complies with the guidelines set by the Registrar of Firms and does not infringe on any trademark.
The name must not contain words that may indicate government approval, like "Crown" or "Emperor."
It should not resemble any existing registered company or partnership firm to avoid legal complications.
Step 3: Draft the Partnership Deed
The next step is to draft the partnership deed. It is advisable to hire a legal expert for this process to ensure that all important clauses are included. However, you can also draft it yourself by ensuring that you cover the following essential clauses.
Step 4: Essential Clauses to Include in a Partnership Deed
Names and Addresses of Partners:
The partnership deed should clearly state the full names and addresses of all partners.Business Name and Address:
Include the name of the partnership firm and the address of its principal office.Nature of Business:
Describe the nature of the business activities the partnership will undertake. This ensures that all partners are aware of the type of business they are entering.Capital Contribution:
Specify the capital each partner is contributing to the business. This can include cash, property, or other assets.Profit and Loss Sharing Ratio:
Clearly outline how the profits and losses will be distributed among the partners. This ratio does not necessarily have to be equal; it can be based on each partner’s capital contribution or other factors.Duties and Responsibilities:
Clearly define the roles and responsibilities of each partner, such as management, finance, operations, etc. This avoids any confusion and ensures a smooth workflow.Interest on Capital and Loans:
Mention whether any interest will be paid on the capital contributed by partners or on any loans provided by partners to the firm.Salary or Remuneration to Partners:
If any partner is entitled to a salary for managing the business, the terms of this remuneration should be outlined in the deed.Admission and Retirement of Partners:
This clause defines the procedure for the admission of new partners and the retirement of existing partners. It should also cover how the capital and goodwill of the business will be treated in such situations.Dissolution of the Partnership:
Include a clause that details the conditions under which the partnership can be dissolved and the process for settling the accounts, distributing assets, and managing liabilities.Dispute Resolution:
It’s important to specify the method of resolving disputes that may arise between partners. Mediation or arbitration can be listed as preferred methods.Duration of Partnership:
Mention whether the partnership is for a specific period or project, or whether it is a partnership at will, which can be dissolved at any time by mutual consent.
Step 5: Get the Partnership Deed Signed
Once the deed is drafted with all the necessary clauses, each partner must sign the document. The deed should be signed in the presence of witnesses to make it legally binding.
Step 6: Register the Partnership Deed
Although registration of a partnership deed is not mandatory under the Indian Partnership Act, 1932, it is highly advisable. A registered partnership enjoys more legal rights than an unregistered one.
To register the partnership deed, follow these steps:
Submit the Form: Submit the application form along with the partnership deed to the Registrar of Firms in your state.
Pay the Fees: Pay the required registration fees.
Submit Necessary Documents: Attach documents such as the partnership deed, identity proofs of the partners, and proof of the business address.
Obtain the Certificate of Registration: After verification, the Registrar will issue a Certificate of Registration, officially recognizing the partnership.
Step 7: Stamp Duty for Partnership Deed
The partnership deed must be printed on non-judicial stamp paper of appropriate value as per the Stamp Act. The value of stamp paper varies from state to state in India. Ensure you pay the correct stamp duty to avoid penalties later.
Step 8: Notarization (Optional)
While notarization of the partnership deed is not mandatory, it is advisable to have it notarized as it provides additional authenticity to the document.
Importance of a Partnership Deed
A partnership deed serves as a safeguard for all partners in the business. Here’s why it’s important:
Prevents Disputes: By clearly defining roles, responsibilities, and profit-sharing ratios, a partnership deed helps prevent conflicts and misunderstandings among partners.
Legal Proof: The deed serves as legal proof of the partnership's existence and the terms agreed upon by the partners.
Facilitates Smooth Business Operations: With a clear outline of management roles and decision-making processes, the partnership deed ensures smooth day-to-day operations.
Conclusion
Creating a partnership deed is a crucial step in forming a partnership business. It provides a framework for the functioning of the partnership and protects the interests of each partner. By following the steps outlined above and including all necessary clauses, you can create a legally sound and comprehensive partnership deed that ensures the smooth operation and growth of your business.
