Since partnership is the outcome of an agreement, it is essential that there must be some terms and conditions agreed upon by all the partners. Such terms and conditions may be either oral or written. The law does not make it compulsory to have a written agreement. However, in order to avoid all misunderstandings and
disputes, it is always the best course to have a written agreement duly signed and registered under the Act. Such a written document which contains the terms of agreement is called ‘Partnership Deed’. It is also called ‘Articles of Partnership.’ The partnership deed should contain the following points:
- The name and address of the firm.
- Names and address of the partners.
- The type and nature of the business the firm proposes to do.
- Amount of capital to be contributed by each partner and whether the capital accounts will be fixed or fluctuating.
- Interest on capitals:- Whether interest is to be allowed on capitals. If so, the rate of interest.
- Drawings:- How much amount the partners are entitled to withdraw for personal use.
- Interest on Drawings:- Whether interest will be charged on partner’s drawings. If so, the rate of interest.
- Profit Sharing Ratio:– The ratio in which profits or losses are to be divided among the partners.
- Salary:– Whether any partner will be paid salary for the work done by him. If so, how much?
- Goodwill:– Method of valuation of goodwill in case of admission or retirement of a partner.
- Accounting Period of the Firm:– The period after which the final accounts of the firm are to be prepared. Whether yearly or half-yearly and the date on which accounts are to be closed every year.
- Method of recording of firm’s accounts and the safe custody of the books of accounts and other documents of the firm.
- Auditing:- Whether the firm’s books will be audited or not: If so, the mode of auditor’s appointment.
- Date of Commencement of partnership.
- Duration of partnership:- The period for which the partnership has been established and the mode of dissolution of Partnership.
- Use of the decision of Garner vs Murray:– Whether decision in the case of Garner vs Murray is to apply in the case of insolvency of a partner.
- Bank Accounts:– Whether the account in the bank will be opened in firm’s name or in some partner’s name ? Who will have the right to sigh the cheques?
- Rules to be followed in case of admission of a partner.
- Rules to be followed while settling the Accounts on Retirement:- The manner in which the amount due on the retirement or death of a partner will be calculated and the manner in which it will be paid.
- Settlement of Disputes:– In case of dispute among the partners, how the dispute will be solved. Whether arbitrator will be appointed?
Importance of Partnership Deed:-
Though, the law does not make it mandatory (compulsory) for every firm to have a partnership deed, it is desirable to have it due to the following reasons:
- It regulates the rights, duties and liabilities of each partner.
- It helps to avoid any misunderstanding amongst the partners because all the terms and conditions of partnership have been laid down before hand in the deed.
- Any dispute amongst the partners may be settled easily as the partnership deed may be readily referred to.
Hence, it is always the best course to have a written partnership deed duly signed by all the partners and registered under the Act.
RULES APPLICABLE IN THE ABSENCE OF PARTNERSHIP DEED
In the absence of a Partnership Deed or Verbal agreement, or if the Partnership Deed is silent on a certain point, the following provisions of Partnership Act, 1932 will be applicable :-
- Profit – Sharing Ratio:- Profits and Losses are to be shared equally irrespective of their capital contribution.
- Interest on Capital:- No interest on Capitals shall be allowed to the partners. If there is a provision for the interest on capitals in the partnership deed, it will be allowed only when there is a profit.
- Interest on Drawings:- No interest is to be charged on drawings.
- Salary to a Partner:- No partner is entitled to any salary or commission for taking part in running the firm’s business.
- Interest on Loan:– Interest at the rate of 6% per annum is to be allowed on a partner’s loan to the firm. Such interest shall be paid even if there are loses to the firm.
- Admission of a New Partner:– Without the consent of all exiting partners no new partner can be admitted to the firm.
- Each partner can participate in the conduct of business.
- Each partner can inspect the books of firm and can take a copy of the same.
It should be remembered that partners may change any of the above provisions by coming to a common agreement.