A partnership is based on a contract. The contract can be oral or written, but an oral contract can be subject to misinterpretation and result in disagreements among partners. The contract is, therefore, put in writing to avoid disagreement or disputes among partners. This written contract is called a Partnership Deed or Articles of Partnership. All relevant conditions or stipulations can be included in the partnership deed, but the following content must necessarily be included:
Content Of Partnership Deed
(1) Name and address of the firm: The name of the firm:
- should not be similar to that of another firm so that one can be confused for the other.
- should not be such that it implies the sanction or patronage of the government (1) and is likely to mislead the public.
(2) Names and addresses of the partners
(3) Nature and scope of the firm’s business: The partnership deed must specify the nature and scope of the firm’s business-whether its field of activity will be local, national or international. The deed must also specify the goods or services in which the firms will be dealing and what will be limits of its operations.
(4) Duration of partnership: If the partnership is for a specific period, or is made with the object of executing a specific project, it’s duration or objective should be clearly mentioned in the partnership deed.
(5) Contribution of capital by partners: Which partner will invest how much capital in the firm should be clearly stated in the deed. It should also be specified whether or not any interest-and how much-is to be paid to the partners for their investment in the firm.
(6) Sharing of profit and loss: The profit and loss sharing ratio of the partners should be clearly defined in the partnership deed. It is not always necessary that the share of the partners in the profit or loss of the firm is proportionate to their investment: it might depend on the partner’s skill or proficiency, experience or his capacity to make further investment in case of need.
(7) Loans to and by partners: The deed should also clarify whether the firm can give or take loans from the partners, and what will be the rate of interest on such loans.
(8) Commission and salary of partners: All partners may not be contributing the same in terms of time and skill to the firm’s business. Those who can, would need to be compensated in some manner for their time or skill. The partnership deed should specially define any commission or salary to be paid to the partners.
(9) Drawings and interest on drawings: Can the partners draw any money from the firm’s account for their personal requirement? If so, the deed should define the limits of such drawings and the interest payable on them.
(10) Audit of books of accounts: The partnership deed should clearly state the mode of keeping the firm’s books of accounts and the way the final accounts are to be prepared. The method of auditing the accounts, and who will be the auditors needs also to be specified in the deed.
(11) Rights, duties and liabilities of partners: Every partner has the right to participate in the conduct of the firm’s business, but the partners can come to any agreement about their rights, duties and liabilities. The partnership deed should define the limits of the rights, duties and obligations of the partners.
(12) Admission and retirement of partners: The admission or retirement of a partner must be according to the provisions of law. If there is any special provision agreed to among the partners, it should clearly be stated in the partnership deed.
(13) Goodwill of the business: The partnership deed should specify the method of evaluating the goodwill of the firm. Such evaluation becomes important when a new partner is admitted to the firm or an existing partner retires.
(14) Dissolution of partnership: The deed should specifically state the circumstances under which the firm can be dissolved.
(15) Death of a partner and his succession: When a partner dies, his investment in the firm and any amounts due to him under the final accounts of the firm are given to the deceased partner’s successor or legal representative. If the investment is to be kept in the firm and the successor of the deceased partner is to be admitted as a partner, it should be clearly mentioned in the partnership deed. If the investment of the deceased partner is to be paid to his representative in installments, the rate of interest to be paid should be defined in the deed.
(16) Violation of partnership rules: If a partner is neglectful in the performance of his duties or violates the partnership rules, the steps to be taken against the erring partner should be defined in the partnership deed.
(17) Breaking relationship from the partnership: If a partner, for whatever reason, wants to break his relationship and separate from the partnership, the deed should specify how it can be done. As a general rule, the partnership terminates when a partner dies or separates from the firm.
(18) Arbiteration clause: The partnership deed must specifically state if an future disagreements or disputes amongst partners will be subject to arbiteration. If it is agreed to be so, the deed needs also to specify how the arbiterator will be appointed and what will be his rights.
The above mentioned points are not mandatory and comprehensive for all deeds of partnership. Depending upon the circumstances and the nature of business, the partners may agree to incorporate such other terms and conditions which they feel are appropriate in the circumstances.