How It Works
Partnership Agreement or Partnership Deed is a written agreement between the partners of a firm that outlines the terms and conditions of partnership among the partners inter se and prescribes the profit & loss sharing ratio amongst them.
Contents of Partnership Agreement
A well drafted Partnership Agreement contains the following:
- Definition of business
- Number and name of partners
- Name of business
- Commencement date
- Registered office
- Capital contributions
- Profit/loss sharing ratio
- Remuneration/drawing of Partners
- Interest on capital
- Borrowing power
- Duration of Partnership
- Roles & Responsibilities of Partners
- Admission of new partners
Laws governing the Partnership Agreement in India
The different laws which govern various aspects of Partnership Agreement in India are as follows:
- Partnership Act, 1932 and the rules framed thereunder
- The Indian Contract Act, 1872
- Foreign Exchange Management Act, 1999
- Consolidated FDI Policy, 2020
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Frequently Asked Question
What is a Partnership Firm?
A partnership firm is an organization which is constituted by two or more persons to run a business with a goal of earning profit. Each member of such firm is known as a partner and collectively the firm is known as a partnership firm.
Is there any limit on the number of partners in a Partnership Firm?
There hasn’t been any limit provided on the number of partners according to the Partnership Act, 1932. However, this limit has been prescribed as 50 as per Rule 10 of Companies (Miscellaneous) Rules, 2014.
What are the benefits of a Partnership Firm?
Some of the benefits of a Partnership Firm are mentioned below:-
● Simplest form of business structure (if there are multiple partners)
● Sharing of responsibility and liability among the partners
● Sharing of losses among the partners
● More capital can be contributed as there are multiple partners
● Lesser compliances have to be undertaken
● Registration of Partnership Firm is not mandatory
● There can be different types of partners, such as active, dormant, etc.
How is an LLP different from a Partnership Firm?
A Limited Liability Partnership (LLP) is a relatively newer form of business structure that has been introduced by Limited Liability Partnership Act, 2008. It is sort of a hybrid structure that mutually takes some important features of two business structures, i.e. a Company and a Partnership Firm.
- LLP as a Partnership Firm
It takes some features from the Partnership Firm, in as much as minimum two number of members are required to start the business, all the members are known as partners and they share profits & losses arising out of the business.
- LLP as a Company
Moreover, an LLP also enjoys some of the benefits of the Company structure, such as separate legal entity, limited liability of the partners, perpetual existence, etc.
- Number of Compliances
However, an LLP, though enjoys certain benefits of both Partnership Firm as well as Company structure, also suffers from compliance perspective. An LLP has to be mandatorily registered and the number of annual compliances also increases considerably in comparison to Partnership Firm structure.
Is Partnership Deed required to be notarized?
Yes, it's necessary to notarise a partnership deed. Notarization and registration lends a legality to the deed without which the partnership will just be an agreement without enforceability.
Is it mandatory to register a Partnership Firm?
As per the Partnership Act 1932, it is not compulsory to register a partnership firm. The firm does not have a separate legal identity and registration (or no registration) will not alter this fact. However, registration is the definite proof of the existence of the firm and its legality and there are some certain benefits of the same.
Is there any time period for registering as a partnership firm?
There is no time allotted for the registration of partnership firm. It can be registered anytime, as per partner’s choice that is before the start of business or even after its commencement.
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