Published Sat, 04 Mar 2023 Corporate Law
Partnership is an association of two or more like minded persons formed with a common objective to establish a lawful business house of their choice with the idea of earning profits. However, in any business enterprise the possibility of its incurring loss cannot be ruled out. As a result, the partners in a company jointly agree to divide the company's earnings and losses among themselves in accordance with the predefined shares or proportions they established in the partnership agreement.
A partnership agreement or deed of partnership is a legal document that is executed by two or more partners who intend to operate a business for profit. A partnership deed's main function is to clearly define each partner's responsibilities, ensuring the efficient operation of the partnership company. Any disagreement or conflict that develops between the partners about the partnership rules is resolved with the aid of the partnership deed.
According to Section 4 of the Partnership Act of 1932, a partnership is a relationship between people who have agreed to split the profits from any company that all of them, or any one of them acting on their behalf, engage in.
There are three Pre–requisite for a Partnership to be successful–
(a) a well drafted agreement signed by everyone involved;
(b) the division of business earnings; and
(c) administration of the firm by all or any one or more of them acting for all, or mutual agency.
The mutual agency component, which is the third and most crucial of these three, is what sets a partnership apart from other types of contractual relationships between the parties. The partnership fails if this component is missing.
The criteria for determining whether a partnership exists are the parties' actual intentions and actions as shown by their (a) written or (b) verbal agreements and the external conditions.
A partnership agreement may be reached verbally, in writing, or even by inference from the partners' previous transactions. It is advised that a formal agreement specifying the terms and conditions of the partnership be signed between the partners in order to prevent any conflicts pertaining to them. All of the partners sign the deed, which is written as an agreement to do certain business in partnership under specific terms and circumstances.
Usually, a partnership agreement specifies the partnership's lifespan or how long it will last. In the absence of such a clause, the partnership is "at will."
Credibility: Compared to an unregistered business, a partnership firm has greater credibility. Additionally, authorities and investors favour registered businesses over unregistered businesses.
Mechanism for dispute resolution: In legal conflicts resulting from any commercial problem, a registered firm has the right to intervene on behalf of third parties in court. Any rights outlined in the Partnership Act cannot be enforced by the partners of an unregistered partnership business.
Clarity in Duties and Responsibilities: All partners' roles, expectations, responsibilities and obligations are clearly outlined in the Partnership Deed. Each partner may have different obligations and responsibilities than the other.
Access to Capital: Some participants to a partnership may inject some cash into the business while others could be better connected strategically. This might assist your firm in luring in new investors and raising further funds to expand. A correct partner could also improve the capacity to obtain financing for business expansion.
Bridging the Gap in Expertise and Knowledge: One may acquire a greater breadth of skills for many aspects of business by partnering with someone having vast experience. A solid partner could also contribute expertise and experience that the other might be lacking, as well as complementing abilities that will benefit in business expansion.
Lesser Regulatory Compliance: Compared to Limited Liability Partnership (LLPs), registered partnership firms have a reduced yearly compliance load. A partnership firm is not required to select an auditor. Additionally, a partnership business is exempt from filing sales tax, service tax, and other taxes based on turnover.
We should include all of the rules and regulations that apply to a certain partnership business while writing the partnership deed. Before forming a partnership to do business, partners are often interested in coming to an agreement on a few key points. As the drafter of the partnership deed, you should take additional effort to comprehend and accurately integrate the following provisions:
(1) Business name and location
(2) The partnership's duration.
(3) A portion of each partnership's revenues and losses from the company.
(4) The business's management.
(5) The type of primary task that will be done in cooperation.
(6) The total number of partners and the initial amount invested by each.
(7) Provision and, if necessary, how future capital would be raised.
(8) Each partner's share of the work, if any.
(9) Partners who are employees of a partnership firm have obligations.
(10) Managing bank accounts.
(11) Partners' withdrawal.
(12) The company's accounting system.
(13) Whether the company location is owned by the partnership or a specific partner.
(14) In the event of a partnership breakup, the company' goodwill will be divided or transferred.
(15) The division of partners' assets and liabilities at the time of dissolution
(16) Rules for adding or allowing additional partners.
(17) The outcome of a partner's passing, including whether his heirs will continue the partnership in his place, the other partners will carry on the partnership, or the partnership will be dissolved.
(18) A provision for addressing partnership conflicts among the partners, should they occur.
Business Information: The deed should clearly incorporate the basic information of the parties involved, their objectives and goals pertaining to the proposed business, how to operate the business and other information that is essential to the businesses involved
Nature of Relationship: Defining the nature of the connection between the partners is one of the most crucial aspects of the partnership deed. When the partners do not initially agree on how the relationship is meant to work, potential disputes can result frequently at the stage of implementation.
Contribution of Partners: Contribution of parties must be unambiguously specified in the Partnership Deed. This is done in order to make sure that each party is aware of what they will be devoting to the business and that they are both obligated by that promise. A partner's commitment need not be restricted to money. It may commit resources, anything of value, or other assets (including real estate, machinery, or intellectual property).
Roles & Responsibilities of the Partners: All partners' roles, expectations, responsibilities and obligations are clearly outlined in the partnership deed. Each partner may have different obligations and responsibilities.
Distribution of Earnings: The deed must specify how the businesses will distribute earnings fairly.
Introduction of a New Partner: The addition of a new partner to an existing partnership alters the firm's organisational structure. Without the unanimous permission of all of the current partners in the company, and subject to any agreement to the contrary among them, a new partner cannot be admitted to the existing partnership. The individual who is accepted as a new partner in the current partnership is not responsible for any actions taken by the company prior to his admission. The right to retire and introduce new partners under the agreement is set by specific provisions in the partnership deed, with the possible exception that these provisions may be amended by the conditions of a future agreement.
Confidentiality: It is recommended to provide that partners who receive confidential information about the business or other partner, keep such information confidential, and to provide that they cannot use the information for any purpose that may be prejudicial to the partnership as a whole.
Dissolution: The firm is dissolved when all of the partners' inter se legal relationships are severed. A firm may be dissolved in one of the following ways:
Without the involvement of the court, a partnership may dissolve if the participants reach an agreement, or if all of the partners or all but one of them are declared bankrupt, by the firm's operations being illegal, subject to an agreement between the partners, by the conclusion of the predetermined period, by a partner's death, by a partner's insolvency; and by written notification in the case of a partnership at will.
Indemnification: Indemnification clause provides for the limits of liability and the process for reimbursement of indemnity claims and is considered as the most scrutinized clause in case of disputes, therefore, attention has to be paid to ensure that the parties are adequately covered in case of issues relating to the transactions emerge. In this clause the parties to the agreement promise to indemnify the other parties against any losses, occurred because of wrong and malafide information in the warranties and representation clause.
Dispute Resolution and Arbitration: A partnership deed should set out the process for the resolution of any disputes between the parties. This could be simply that disputes are referred to the courts under the respective jurisdiction. Alternatively, the Parties can also include the Arbitration Clause in this agreement. Under Arbitration, any dispute that arises between the parties will be referred to an Arbitrator appointed mutually by parties to the agreement. The decision of the Arbitrator will be final and binding on the parties to the Agreement.
Partnership Deed is a very critical document which defines the conditions and commitments of the individuals coming together for starting a new venture project with a common objective of making profit, hence the same need to be carefully drafted by the experts. Each disagreement or conflict that develops between the partners about the partnership operations is resolved with the aid of the partnership deed. A partnership deed's main function is to clearly define each partner's responsibilities, ensuring the efficient operation of the partnership company.