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The need for a partnership deed

The Need for a Partnership Deed

Posted on July 27, 2022July 27, 2022 By ELXiOYXt No Comments on The Need for a Partnership Deed
Partnership Firm Registration

Partnership deeds bind the partners to their duties when a partnership is formed. Business objectives and basic norms agreed to between the partners are outlined in this document. In times of dispute, it serves as a reference document for the partners. From the moment the partnership is formed, each partner has a number of rights and obligations.

A partnership firm is an organizational structure involving two or more individuals operating a common business. It is advisable to outline details, powers, and responsibilities in writing when two or more people are involved. Despite the fact that an oral partnership deed is not restricted. A written agreement serves a firm’s tax purposes well. GST numbers require a partnership deed.

Partnership Deeds: What Are They?

Partnership deeds are written agreements signed by the partners of a partnership. All their rights and obligations regarding the firm and the business are clearly stated. Partnership deeds are signed by the solicitor and witnesses, as well as all the partners. Drafting the document is primarily intended to prevent future disputes among partners and to specify the course of action in the event of a dispute.

An important document for a partnership is the partnership deed. It is similar to a company’s memorandum of association. When partners register their partnership firm with the firm’s registrar, it establishes its legality.

Partnership Deeds and Their Consequences

Partnership deeds should be well-drafted when partners get together to manage and run a business. It also allows partners to register the firm with the state’s registrar of firms where its workplace is located. Without a written partnership agreement, partners may face a variety of consequences.

Distribution of Business Profits

Several partners run different businesses or professions through the firm. A predetermined ratio divides profits among partners. Is this ratio written down? With the consent of all partners, they agree on a profit-sharing ratio and distribute profits equally. 

Such provisions are included in a partnership deed. Unless the partnership specifies a ratio, the profits are divided equally between the partners according to section 24 of the partnership act. It is only the deed that proves the consent of a partner in a dispute regarding the PSR ratio being unfair. Signed by both partners, it serves as a legal document.

Retirement and Dissolution

A partnership may be dissolved by any one partner under the Partnership Act. The other partners can be notified. Dissolution means that all trading ceases at the time of dissolution. The assets are sold, liabilities are paid off, and surplus cash is returned to the remaining partners. It is a complex process to dissolve a partnership, and therefore partners should establish clear guidelines and rules before moving forward.

Similarly, during the retirement of a partner, other remaining partners get all the profits after separation. It is where partnership plays its role. In the pre-decided route for dissolution, partners agree to the rules, and they write them in the deed. It avoids any chances of disputes or disagreements between the partners.

Registration for GST

A partnership deed is one of the documents required for the GST registration process, along with a PAN, an Adhar, and other documents of the partners. 

In order to understand the importance of partnership firms having a GST number, let’s first understand what GST is. Goods and Services Tax is the full name of GST. All indirect taxes have been dissolved by this destination-based tax. If a company’s turnover exceeds a specified limit, it must register. Partnership firms are limited to 40 lakhs per year. Voluntary registrations are also taken by firms for the benefit of enhanced business and satisfied suppliers. The registration of certain firms is compulsory, and an eCommerce company is an example.  

Through GST login and the respective accounts, we process GST payments and returns. Registration of new applicants is possible through the GST portal. A PAN card of the firm and its registered partnership deed are required for registration of the firms, according to the portal. A GST registration cannot be obtained without the document.

Inability to File Legal Action against Third Parties

There is no restriction on who can initiate legal proceedings and bring a case to court against the other. For partnerships without a partnership deed or without a registration, there is a restriction. Unregistered partnerships are not considered legal persons by law when they are unregistered. 

Partnership deeds can only be registered by firms that have drafted them. The partners cannot file a lawsuit against outsiders when they clash with the partners. Having a partnership deed drawn up and registered with the registrar is always a good idea. 

In Summary

Adding to the firm’s existence and the relationship between its partners is the partnership deed. In the absence of it, partners are nothing more than business owners. 

Every level of business requires documentation, and firms are no different. The partnership deed is the most important document in a partnership firm. Individual interests are overridden by the deed, which promotes the mutual interests of all partners.

Read more,

  • What Are the Steps to Open a General Partnership?
  • Dissolution of a Partnership
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