A partnership deed or partnership agreement is an important legal document in India. The document serves the purpose of avoiding unnecessary misunderstanding, harassment, and unpleasant incidents among the partners of a business entity in case of any dispute. Two traditional types of partnerships are possible – general partnerships and limited partnerships.
In a general partnership, all partners face unlimited personal liability for business debts. In a limited partnership, some partners act as passive investors – they don’t take part in day-to-day business decisions, and their liability for partnership debts is limited to the amount they invested.
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A professionally drawn, comprehensive document, written by a solicitor is an ideal document to execute. It must contain a large set of commercial and practical provisions that will help you manage your business and inter-partner relationships. This document should give you a high level of protection in today’s environment.
The law relating to partnerships is very basic indeed. It doesn’t reflect how modern-day partnerships operate. A good agreement, therefore, should not only improve on the default provisions but also include paragraphs that set out in greater detail how your business will work.
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Is Partnership Agreement Mandatory In India?
No, there is no need to have registration of partnership deeds in India. Forming a partnership does not legally require the execution of a partnership agreement. If you don’t execute an agreement, however, the default rules of state partnership law will govern your partnership.
Default rules are laws that apply only if there are no contrary provisions in a partnership agreement. State partnership laws also contain mandatory provisions that apply regardless of the terms of the agreement.
Advantages of Partnership Agreement
- A partnership agreement is relatively easy to establish
- It is ideal for partnerships with between 2 and 10 partners. However, you can use the agreement for larger partnerships as well.
- You may attract prospective employees to the business if given the incentive to become a partner.
- Ownership of partnership assets and share of income and expenses does not have to be in equal proportions. Your sharing ratio could be 50:50, but it could also be 60:40, 70:30, or any other.
- A partnership agreement benefits from the combination of complementary skills of two or more people. There is a wider pool of knowledge, skills, and contacts in your organization.
- You can use this agreement if one or more of the partners is ‘sleeping’ or ‘silent’, i.e. contributes finances, experience, or assets but does not take part in the day-to-day running of the business.
- Whilst partners in most partnership arrangements are likely to be human individuals, this agreement can be used where one or more is a company or even a non-profit organization.
- Your ‘business’ as partners could be a single specific project, such as a technology development project, and does not necessarily have to be commercial in nature.
When is an Agreement Required in Partnership?
A partnership agreement is likely to be required in the following circumstances:
- Firstly, when two or more people start a new business or project together
- when a new person takes a share of an existing business operated by one person
- Additionally, when existing partners want to formalize their mutual agreement
- when existing partners want to change the balance of control and ownership of the business
Essential Clauses in Partnership Agreement
- The agreement must have a profit-sharing ratio among the partners.
- The business objective of the partnership
- Partnership property
- Loans to the partnership
- Banking arrangements
- Records and accounts
- Meetings and voting
- Holidays & Absence
- Good faith & Partnership policies
- Restrictions on Partners
- Intellectual property
- No competition & Expulsion
- Termination of the partnership. Comprehensive termination provisions to protect ongoing partners.
- Indemnity for the Partnership
- Publicity / Announcements
In India, you must print the partnership agreement on a Non-Judicial Stamp Paper with a value of Rs.100/- or more. This type of agreement is usually signed in the presence of all the partners and each of the partners would retain a signed original for his/her records.