Partnership Deed: Definition

The document containing the terms and conditions of a partnership is known as a partnership deed.

In the absence of an agreement, the partnership act is applied. However, the act leaves it to the discretion of partners to resolve disputes.

In case disputes arise between the partners, therefore, a written agreement between the partners is usually helpful.

Important Points in a Partnership Deed

The following points are mentioned in a partnership deed:

  • Names of the partners
  • Name and nature of the business
  • Capital contributed by each partner
  • The ratio of gain or loss
  • Rate of interest allowed on a partner’s capital
  • Salary to be paid to a partner for doing extra work
  • Maximum withdrawal of a partner during a particular period
  • Whether a partner’s capital is maintained on the fixed or fluctuating methods
  • Life of partnership business
  • Rate of interest on drawings (if any) to be charged
  • Interest on partner’s loan
  • Financial period for determining the gain or loss of the business
  • Method of valuation of goodwill at the time of admission, the retirement of a partner, mergers, and dissolution
  • Method of calculating the amount due to a retiring partner or to the successors of a deceased partner
  • The procedure for paying the amount due to the retiring partner or executors of a deceased partner
  • Clauses regarding arbitration in the event of a dispute
  • Procedure for dissolution of the firm
  • Treatment of assurance policy (if any)

Rules in the Absence of Agreement

In the absence of a written agreement, the following rules are applicable in a partnership:

  • Each partner will contribute equally toward the capital of the firm
  • Gains and losses of the firm will be distributed equally among the partners
  • No salary will be paid to partners for performing duties in the firm
  • No interest on capital will be allowed
  • 6% interest on partners’ loans other than their capital will be allowed
  • The firm will have to indemnify every partner for the expenses incurred or payments made by one on behalf of the firm
  • Without the consent of all the partners, no one can be admitted as a partner
  • Every partner has the right of access to the books of accounts
  • Every partner has the right to participate in the conduct and management of the business
  • A retiring partner or executor of a deceased partner has the right to a share in the profits, earned with the help of the assets that belong to them or interest at 6% per annum, at the option of such partner or their executors

Frequently Asked Questions

What is a partnership?

A Partnership is formed when two or more persons agree to carry on a business with a view to sharing the profits.

What are the assets of partnerships?

All money, goods, things in action and other property acquired for the firm and all debts owing to it at the time when the Partnership begins are called assets of a firm.

Who is the owner of assets of a firm?

The assets of a firm are legal property in the hands of each partner. Each partner has equal rights to use them, but not to possess them exclusively.

What is the capital of a firm?

Capital means contribution made by partners for starting the business. Capital means share in the property of a firm, which is invested by each partner for starting business under name of the firm.

What are the profits and losses of a firm?

There are three kinds of partners: general partners, limited partners and registered partners. Only general partners have unlimited liability unlike limited or registered partners whose liability is limited to the extent of their contribution. In a firm, there are three kinds of shares - capital shares, profit shares and loss shares.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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