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Partnership Deed and Provisions of the Indian Partnership Act 1932

Last Updated : 05 Apr, 2023
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Partners are two or more people who agree to carry on a business and share the profits and losses of the business. They are persons who join hands together with a common interest to start a business and share its future profits or losses. 

Partnership defines the state of being associated with the partners who have agreed to carry on the business by all or any one of them acting for all and sharing the business profits and losses.

According to section 4 of the Indian Partnership Act,1932, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any them acting for all.”  

The Indian Partnership Act 1932 further states that the persons who have agreed to enter into a partnership are known individually as partners and collectively as a firm.

Meaning of Partnership Deed:

A partnership deed is a written document among the partners related to the terms and conditions of the partnership business. It is a legal agreement between partners to run an enterprise. A partnership comes into existence by an agreement that may be written or oral. Thus a document that contains all the terms of the partnership as agreed to by the partners is called a Partnership Deed or Article of Partnership.

A written Partnership Deed is a very important document to have, as it helps to settle any possible dispute with regard to the terms of the partnership.

It is a document signed by all the partners, after which it should be duly stamped under the Indian Stamp Act, 1889, which makes it a legal document. A written deed serves as a piece of evidence in the Court of Law.

The Partnership Deed generally includes the following details:

1. Description of Partners: Names, descriptions and addresses of the partners.

2. Description of Firm: Names and addresses of the firm.

3. Principal Place of Business: Address of the principal place of business or profession.

4. Nature of Business: Nature of business or profession the firm proposes to carry on.

5. Commencement of Partnership: Date of commencement of partnership.

6. Capital Contribution: The amount of capital to be contributed by each partner and also whether the capital accounts shall be fixed or fluctuating.

7. Interest on Capital: Whether interest is to be allowed on capital or not should be written in the deed. If it is allowed, then the rate of interest should be mentioned.

8. Interest on Drawings: The interest to be charged on drawings should be written in the deed, along with the rate of interest to be charged.

9. Profit Sharing Ratio: Ratio to share profits or losses agreed by the partners.

10. Interest on Loan: If a partner has an advanced loan besides his capital, will interest be allowed to him? If yes, then the rate should be mentioned.

11. Amount of Salary, Commission: If a partner is to be paid salary, commission, etc., it should be written in the deed.

12. Death of Partner: Whether the firm continues or dissolves after a partner dies should be mentioned.

13. Settlement of Accounts: The manner in which accounts of partners shall be settled in case of retirement, death, or dissolution of the firm.

14. Rights and Duties of Partners: The authority and duties of each partner should be mentioned.

15. Duration of Partnership: The period for which partnership is established.

16. Bank Account: Modes of operations of bank accounts by partners, i.e., jointly or individually.                       

Provisions of The Indian Partnership Act,1932 (in the absence of Partnership Deed): 

The partnership is governed by the Partnership Act,1932. The provisions of the partnership act are important to resolve unforeseen situations, which are not mentioned in the partnership deed or in the absence of the partnership deed. A partnership deed may have clauses that are contrary to provisions of the act. In such cases, the partnership is governed by the provisions of the deed and not the act. If the partnership deed does not contain a clause related to any problem in partnership, then it will be governed by the provision of the partnership act. 

Example: If the partnership deed is silent on the interest to be paid on a loan advanced by any partner, then 6% interest is to be paid to the concerned partner even if the business bears a loss in the financial year. The partnership act is applied when the partnership deed is silent on any particular issue or absent. 

In the absence of a partnership deed or if it is silent to any clause, the following provisions of the Indian Partnership Act,1932 will apply:

1. Sharing Profit & Losses: If the ratio or percentage is not mentioned in the partnership deed related to sharing of profits or losses amongst the partners, then the provisions say that it has to be shared equally by the partners.

2. Interest on Capital: In the partnership deed, if the percentage of interest to be allowed on capital is silent, then the provisions suggest not allowing any interest on capital to partners.

3. Interest on Drawings: In the partnership deed, if the percentage of interest to be charged by the partners for the amount withdrawn by them is silent, then the provisions say not to charge any interest on drawings from the partners.

4. Interest on Loan by Partner: If the partnership deed is silent on the terms related to interest paid to the partner advancing the loan, then according to the provisions of the partnership act, the interest on loans is allowed @ 6% p.a., and such interest is payable even if there is a loss.

5. Salary/Commission to a Partner: The provisions of the partnership act states that remuneration is not allowed to any partner if the partnership deed is silent for it.

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