Partnership Agreement or Partnership deed is the most important paper or document in Partnership. It includes all the rights, liabilities, roles of each partner and also govt. rules. Entrepreneurs in the sole proprietorship or partnership have some predefined goals and work to achieve them.
As being alone, the advantage of sole proprietorship is that there as no need to note down anything.All decisions are made by the owner. But in partnership, everything must be discussed and written in Contents of Partnership Deed to run the business smoothly.
Table of Contents
Importance of Partnership Deed
The partnership agreement may be oral or written or implied conduct of parties. One of the most important attributes of the partnership deed is that it is necessary to have the agreement in writing. So, in case of dispute or misunderstanding among the partners, it may be removed according to the provisions of this document.
It must be drafted by a lawyer and written on a judicial paper. It should be stamped according to the provision of the Partnership. Act of 1932. Partnership deed must be signed by all the partners concerned. It is highly advisable to register the partnership deed with the registrar.
Important Contents of Partnership Deed
The usual provisions which should be contained in such documents are as follows:
Name of the Firm to Start
Name of the firm under which the business is to be conducted. It may be any name you choose.
Nature of Business
Nature of the business to be conducted by the partners. There are different types of businesses that includes rendering services, making products, being a distributor of a brand, opening a retail shop, dealing with wholesale, importing or exporting goods. Anything but legal.
Business Location
Location of the business where it is to be operated. If its a production concern, the better option to be an industrial area but if it is a retail shop, go to the market where people come and buy and if, it is a service providing i.e., service at client’s doorstep – it may be anywhere.
List of Partners
List of partners, their names, addresses and other particulars. Who are the partners and what will they do. The best practice is to divide departments of businesses according to partners expertise. It would be wrong to assign human resources or retailing duty to a partner if he/she is educated with Marketing subjects.
Duration of Partnership
Duration of the partnership; whether it is a definite period of time or indefinite period of time. It is mandatory to mention in deed. Sometimes the business may not go smoothly; this portion of the partnership deed can help to end the business in minutes or it may be extended or rewritten if in case they want to extend
Date Of Business Commencement
It is an important part of the deed. If the business is going to be legally listed in state law. The date of business starting could help in managing all responsibilities and other tasks of business including accounts, expenses, payable & receivable.
Total Capital Invested
The total capital of the firm and the share of each partner in the capital must be in writing to equally or partially distribute on closing.
Ratio of Profit
Usually, it is the same as the ratio of capital investment. There are different types of partners according to their job natures, capital investment, responsibilities, their practical share in the business. This is why the ratio of sharing profits and losses of each partner should be noted indeed.
Amount of Drawing
Do you think to take permission of withdrawing profit or capital? In partnership deed, it is mentioned in two terms
- What profit percentage owners can withdraw from the business per month or year
- What monthly amount anyone can take out on the monthly or yearly basis
Interest on Capital and Drawings
Not in sole proprietorship but in the partnership it may be discussed to charge a profit on the invested amount. The invested amount in business can be invested in some other business or deposited into a bank to get monthly/yearly profit. That’s why in a few businesses or shareholders can demand interest depending upon the amount and expected ROI
Amount of Salary
At good businesses, there are fewer chances of withdrawing profit from a business. The best practice is to set a monthly fixed salary to each stakeholder. Salaries may depend on capabilities, capacities, roles, and roles.
Division of Work
Of course, investors can not manage every part of a business. There are multiple working in businesses from raw material purchases to finished products sales and recoveries. In a partnership contract, it is mentioned that which partner will do what part of the business and what would be their specific roles. Interference in other works could be supplementary.
Amount of Profit
Few businesses do share a specific part of the profit to employees. It’s not their monthly salary; it’s add-on or extras to please workers to motivate them to perform duties well. An employee may be demotivated with time. Such incentives could be energizing. It so, it should be entitled indeed.
Head Office and Branches
Small or Large businesses can have more than one branches. If so, those details are noted down on contract papers including locations, branch roles, branch responsibilities and not exceeding predefined monthly expenses.
Dealing Bank
Which bank to be selected for all business transactions like Royal Bank of Scotland, Bank of America or Santander. This may include signatory authority for banking purposes and the number of accounts to be opened in selected branches of a decided bank.
Additional Capital
How to further capital, if necessary is to be introduced. Either it is to be availed through bank loans or partners may be requested for further investments.
Audit of Accounts
There are many lop holes of dishonest employee in every business. This reason gave birth to the auditing of accounts. There are more chances in businesses where more than two people are owners. This added part deals with provisions regarding the preparation audit and signing by the partners of annual accounts.
Rules of Admission and Withdrawal
Defining things before the problem is to be proactive. This provision means to set rules regarding retirements of adding a new partner, managing debt on the retirement of an existing partner, how capital will be returned to investors and other long-term decisions.
Determination Of Good Will
This deals with how the value of goodwill is determined to each stakeholder. Each partner has a special role in a business that and accounts will be cleared of a retired or deceased partner.
Period of Accounts
Do not ignore accounting at any cost because, accountants prepare Profit and Loss statement, the Balance sheet at the end of the fiscal year in the manual accounting system. In all cases, it should be mentioned in contract papers to evaluate business worth after a specific time. With increased technology and advanced accounting software everything is prepared with the single entry.
Rights and Duties of Partners
Partner is different according to their rights, duties, investment and partnership contract. Each partner’s rights and duties should be clearly mentioned in the contract need to avoid disputes. In general, the sleeping partner has no role in business decisions but if decided earlier, they can take occasional parts in seasonal promoting activities or else.
Loan and Interest
Typically, the business may need a loan in future after startup. Let say, a manufacturing concern may need to import advanced machinery or consumer product based businesses may think to do mass level advertising to boost sales. In both cases or others, they may not have enough funds, plans may not be actionable. This clause helps such situations to decide whether to take a bank loan, if so; who will be a guarantor or what properties should be pledged. These noted details take business decisions smoother.
Settlement of Accounts
The hardest thing – dissolution. It happens in most of the partnership business just because of extra interference or business losses. This content of deed, if decided; could help partners to dissolve everything smoothly and by Settlement of payable and receivable accounts, business assets distributions or other liabilities and credits to be shifted on…
Arbitration
Disputes happen. Business is an ongoing process of taking decisions, implementing strategies, sorting issues, designing new products and services. Partnership business is a combination of different minds and every mind has a different perspective, thoughts, and observation. In those disputes, what should be the solution?
Deficiency in Capital
How the deficiency in the capital will be covered at the insolvency of an arty partner.
Witness
Definitely, contracts are written and signed. There must be witnesses of agreement in partners. Minimum witnesses may be different according to your state law. Witness name, contact details, and authenticity of witness with their Social Security number, Country citizenship number (they are the real human, not fake) should be noted.
Ways of Dissolution
Bitter but fact-based disadvantages of partnership include dissolution. In those cases, how to dissolve the partnership company, either it is to be done by state law in court or by mutual consent of all partners.
Others
Any other clause or clauses which may be found necessary at any time may be contained here by the mutual consent of all the partners.
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Equity Joseph says
Thank you for the insights on this matter, but I have a concern. Is it possible and advisable that I have a business idea, well planned and ready to be executed, but I am financially incapacitated, can I call in a few people with capitals to execute the business for me? Will I still be the owner of this business? will that makes them partners?… Kindly Advice
Warm Regards.
Editor says
It entirely depends upon your contract with them. There may be many options in this regard,
You can do the following or any other suitable way
1. Ask them to invest in your project and take their share in the profit/loss (Investors)
2. Make them partners in business (Partnership)
3. Sell them your idea, they invest, they are owners, you take your money or share.
Like above,
there may be many different ways with different terms and conditions.