Partnership Deed, its Importance and Rights of Partners- Accounting & Finance

A partnership is the outcome of an agreement, it is essential that there must be some terms and conditions agreed upon by all the partners. Such terms and conditions may be either oral or written. The law does not make it compulsory to have a written agreement. However, in order to avoid all misunderstanding and disputes, it is always the best course to have a written agreement duly signed and registered under the Act. Such a written document which contains the terms of the agreement is called 'Partnership Deed'.


The importance of partnership deed:-

Having a partnership deed is not mandatory or compulsory by law but it is desirable because of the following reasons:

• It regulates the rights, duties, and liabilities of each partner.
• It helps to avoid any misunderstanding amongst the partners because all the terms and conditions of the partnership have been laid down beforehand in the deed.
• Any dispute amongst the partners may be settled easily as the partnership deed may be readily referred to. 

Hence, it is always the best course to have a written document (partnership deed) instead of oral agreements. 

 The partnership deed should contain the following points:- 

1.  Name and address of the firm.
2.  Names and addresses of the partners.
3.  The type and nature of the business the firm proposes to do.
4.  Amount of capital to be contributed by each partner and whether the capital accounts will be fixed or fluctuating.
5. Interest on Capital - Whether interest is to be allowed on capitals. If so, the rate of the interest.
6. Drawings - How much amount the partners are entitled to withdraw for personal use.
7. Interest on Drawings - Whether interest will be charged on partner's drawing, if so then the rate of the interest will be.
8. Profit sharing ratio.
9. Salary of partner - Whether any partner will be paid salary for the work done by him.
10. Goodwill - Method of calculation of goodwill.
11. The accounting period of the firm - The period after which final accounts of the firm are to be prepared. 
12. Methods of recording of firm's account and safe custody of books of account of the firm.
13. Auditing - Whether firm's account will be audited or not.
14. Date of commencement of partnership.
15. Duration of partnership and the modes of its dissolution.
16. Insolvency of a partner related decision (Garner vs Murray or not).
17. Bank Accounts - Whether bank account is opened in the name of the firm or in the name of any partner. Who is responsible for signing the cheque and other banking related matters.
18. Rules to be followed in case of admission of a new partner.
19. Rules to be followed while settling the accounts on Retirement or Death of a partner.
20. Dispute settlement - In case of dispute among the partners, how the dispute will be solved. Whether arbitrator will be appointed?

Rules in the absence of Partnership Deed:-

In the absence of a Partnership Deed, or if the Partnership Deed is silent on a certain point, the following provisions of partnership Act, 1932 will be applicable:

1.  Profit and losses are to be shared equally irrespective of their capital contribution.
2.  No interest on capital shall be allowed to the partners. 
3.  No interest on drawing will be charged.
4.  No partner is entitled to get the salary for his work done for the business.
5.  Interest at the rate of 6% per annum is to be allowed on a partner's loan to the business. Such interest shall be paid even there are losses to the firm.
6. No new partner will be admitted without the consent of other partners. 
7. Each partner can participate in the conduct of the business.
8. Each partner can inspect the books of the firm and can take a copy of the same.  

Rights of a Partner:

• Every partner has the right to share profits or losses with the partners in the agreed ratio.
• Every partner has the right to take part in the conduct of the business.
• Every partner has the right to be consulted in the matters related to partnership business.
• Every partner has the right to inspect and have a copy of the books of accounts.
• Every partner has a right to disallow the admission of a new partner.
• Every partner is the joint owner of the partnership property.
• If the partner has given a loan to the firm, he has a right to receive interest at the agreed rate. If the rate of interest is not agreed, it is paid at 6 % per annum.
• If a partner incurs expenses or makes payment on behalf of the firm, he has the right to indemnified by the firm.
• Every partner has a right to retire from the firm after giving a proper notice. 

Also Read Partnership Firm - Meaning, Features and Partnership Deed