What is a Partnership?
A partnership is a form of business in which two or more persons conduct the business activities or any of the persons involved acting in behalf of all of them.
What is a Partnership Deed?
A partnership deed is an agreement made between two individuals who have agreed to share the profits of a business in which they are partners.
Essential Points in a Partnership Deed
- Name and address of the partners
- Name and nature of the firm
- Capital contribution of each partner
- Date of commencement
- The drawings that can be made by each partner
Advantages of Partnerships
There are various advantages of partnerships, including:
- Easy to establish
- Low cost
- Two or more people
- Flexible, not rigid
- Tax advantages
- Other advantages
- No burden of management and risk
- Combined skill and judgments
- Dissolution of the firm is easy
Disadvantages of Partnerships
- Unlimited liability
- Limited source of capital
- No independence
- Foundation on the transfer of interest
- Liability after retirement
- No separate entity from partners
Types of Partnership Deeds
There are three types of partnership deeds:
- General partnership
- Limited partnership
- Limited liability partnership
1. General Partnership
A general partnership involves two or more persons carrying out a business purpose or any of them carrying it out for all of the parties. The partners share equal rights and responsibilities in relation to the business.
An individual partner can bind the entire group in a legal obligation. In a general partnership, the concept of risk and return follow; here, the profits are distributed equally and liabilities are shared equally.
General partnerships are further classified as follows:
- Partnership at will
- Particular partnerships
Exceptions in General Partnership
When there is a Minor Partner, the liability of the Minor is limited to the amount of their share in the capital. The Minor is not personally liable for the firm’s debts.
2. Limited Partnership
Limited partnerships involve one general partner with unlimited liability and other partners with limited liability. Limited partners do not have control over the daily operations of the business and they also have limited control over the business.
3. Limited Liability Partnership
In a limited liability partnership, each partner holds liability to the extent of their investment in the business.
At the time of liquidation, partners are not personally liable to pay the firm’s debts.
Limited liability partnerships are not included in the Partnership Act. This includes the Limited Liability Partnership Act 2008.
|Basis||General Partnership||Limited Partnership||Limited Liability Partnership|
|Definition||A general partnership involves two or more persons carrying out a business purpose or any of them carrying it out for all parties. The partners share equal rights and responsibilities in relation to the business.||Limited partnerships involve one general partner with unlimited liability and other partners with limited liability. Limited partners do not have control over the daily operations of the business and they also have limited control over the business.||In a limited liability partnership, each partner holds liability to the extent of their investment in the business. At the time of liquidation, partners are not personally liable to pay the firm's debts.|
|Liability||Unlimited liability||One partner has unlimited liability and the others have limited liability to the extent of their capital investment||Limited liability|
|Act applied||Partnership Act 1932||Partnership Act 1932||Limited Liability Act 2008|
|Exceptions||For Minor Partners, the Minor's liability is limited based on their share in the capital, and the Minor is not personally liable for the firm’s debts||No exceptions||No exceptions|
What Factors are Required to Form a Partnership Deed?
A partnership deed is chiefly formed based on the following factors:
- A partnership deed is mostly said to be a contract that is made between the partners of the business. This binds each of the partners in a legal relationship.
- The minimum requirement for forming a partnership is that there are at least two members and with no more than 10 members in the case of banking and 20 in the case of non-banking businesses.
- Every partner must have a mutual understanding in terms of how the business should be carried out.
- The ratio for profits and losses must be decided in advance by all partners.
- Every partner must maintain the relationship as a principal-agent. Each partner is accountable for the activities carried out by the other partners.
Contents of Partnership Deeds
A standardized partnership deed must contain the following details:
- Names and addresses of the firm
- Business to be carried out by the company's partners
- The duration of the partnership firm relating to whether it is made for a limited period or a specific venture
- Profit- and loss-sharing ratios amongst partners
- Details of remuneration and commission (if any) payable to partners
- The partners' capital contributions
- The interest on capital to be paid to partners
- Policies relating to the drawings from the firm allowed for each partner, as well as interest (if any) to be paid by the partner to the firm on such drawings
- The rate of interest on partner’s capital, partner's loan, and interest (if any) to be charged on drawings
Duties and Obligations of Each Partner
- Each partner must conform to the rules setting out how to respond when a partner retires or dies
- Division of undertaking and responsibility (i.e. the duties, powers, and obligations of each partner)
- The method of preparing accounts and arrangements for audit
- The mode of auditor’s appointment, if any
- The treatment of losses arising from the insolvency of one or more partners
- Settlement of accounts on the dissolution of the partnership firm
- Methods to be followed regarding the settlement of disputes amongst the partners
- Other matters concerning the conduct of business.
The above list is not comprehensive. It is worth noting that, in addition to the items outlined above, any matters affecting the association of partners are typically covered in the partnership deed.
The partnership deed must be made on stamp paper and every partner must have a copy of the partnership deed.
A copy of the partnership deed must also be filed with the Registrar of Firms if the firm is being registered.
Absence of a Partnership Deed
If no partnership deed is created, the following rules apply:
- The partners have an equal share in the profits and losses of the business
- The partners do not receive a salary
- Interest on capital is not payable
- Drawings are not chargeable with interest
- Partners will receive 6% per annum interest on loans to the firm if they mutually consent
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Types of Partnership Deed FAQs
There must be at least two partners, but no maximum limit.
This must be decided in advance by all partners.
Yes, but with interest (if any).
Each partner must conform to the rules set out in the Partnership deed, and generally act prudently and in good faith when conducting the business of the Partnership.
This must be decided in advance by all partners. Typically, upon dissolution, any remaining assets are distributed among the partners in proportion to their share in the Partnership. Any outstanding liabilities are paid by the partners in proportion to their share in the Partnership.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.