Partnership: Introduction, Meaning, Definition, Features, Advantages Types of Partners, Partnership Deed

Partnership - Introduction

When two or more persons come together to establish a business and share its profits and losses, they are said to be in partnership. 

For example, one of your friends has passed class XII from Commerce Stream and wants to start a business. He approaches you to join in this venture. He wants you to contribute some money and participate in business activities. 

Both of you if join hands, constitute a partnership.

                                          

Definition of Partnership:

According to Section 4 of the Indian Partnership Act, 1932 partnership is defined as the ‘relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.

Persons who have entered into a partnership with one another are individually called ‘partners’ and collectively called ‘firm’. 

The name under which the business is carried is called the ‘firm’s name’. 

A partnership firm has no separate legal entity, apart from the partners constituting it.

Essential Features/ Elements / Characteristicsof Partnership:

1. There must be two or more persons. (Minimum 2, Maximum 50) (Click here to know more)

2. There must be an agreement.   (Click here to know more)

3. There must be a lawful business. (Click here to know more)

4. There must be a sharing of profits of the business. (Click here to know more)

5. There must be a mutual agency, i.e., the business must be either carried on by all or any of them acting for all.

6. Unlimited Liability of all Partners.

Test YourSelf  Click Here to Start Quiz

Partnership Deed

The partnership comes into existence as a result of an agreement among the partners.

The document, which contains terms of the agreement is called ‘Partnership Deed’.

1. The agreement can be either oral or written. 

2. The Partnership Act does not require that the agreement must be in writing.

3. The clauses of the partnership deed can be altered with the consent of all the partners. 

4. The deed should be properly drafted and prepared as per the provisions of the ‘Stamp Act’ and preferably registered with the Registrar of Firms.

5. Every firm can frame its own partnership deed in which the rights, duties, and liabilities of the partners are stated in detail. 

6. It helps in settling the disputes arising among the partners in the general conduct of business.

Contents of Partnership Deed

The partnership deed generally contains the following :

-Name and address of the partnership firm;
-Nature and objectives of the business;
-Name and address of each partner;
-The ratio in which profits is to be shared;
-Capital contribution by each partner;
-Rate of Interest on capital if allowed;
-Salary or any other remuneration to partners, if allowed;
-Rate of interest on loans and advances by a partner to the firm;
-Drawings of partners and interest thereon, if any
-Method of valuation of goodwill and revaluation of assets and liabilities on the reconstitution of the partnership i.e. on the admission, retirement, or death of a partner;
-Settlement of disputes by arbitration;
-Settlement of accounts at the time of retirement or death of a partner;
-Circumstances in which the firm can be dissolved;
-Settlement of accounts at the time of the dissolution of a firm.

Benefits or Advantages of having a Partnership Deed

(i) It facilitates the functioning of the business.

(ii) It is helpful in the settlement of disputes arising among partners.

(iii) It helps in avoiding misunderstandings among the partners.

Rules Applicable in the Absence of Partnership Agreement /Partnership Deed

Normally, the partnership deed covers all matters affecting the relationship of partners amongst themselves. 

However, In the absence of a partnership deed, there may arise a controversy on certain issues like profit sharing ratio, interest on capital, interest on drawings, interest on loan, and salary of the partners. In such cases, the provisions of the Partnership Act 1932 becomes applicable:-

(i) Distribution of Profit

Partners are entitled to share profits equally.

(ii) Interest on Capital

Interest on capital is not allowed.

(iii) Interest on Drawings

No interest on the drawing of the partners is to be charged.

(iv) Interest on partner’s loan

A Partner is allowed interest @ 6% per annum on the amount of loan given to the firm by him/her.

(v) Salary and commission to partner

A partner is not entitled to any salary or commission or any other remuneration for managing the business.

Apart from the above, the Indian Partnership Act specifies that subject to a contract between the partners:

(i) If a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm or the firm name, he shall account for the profit and pay it to the firm.

(ii) If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm, all profit made by him in that business.

Test YourSelf Click Here to Start Quiz

Next 

Partner's Capital Account