Nature of partnership and partnership deed
Meaning, features and importance of a partnership deed, and the rules that apply when there is no deed.
The essentials
Section 4 of the Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The persons are individually called partners and collectively a firm. The words "acting for all" express mutual agency: every partner is both an agent and a principal of the firm.
A partnership deed is the written agreement between partners. It is not compulsory by law, but it prevents disputes. It usually states the name and address of the firm and partners, nature of business, capital of each partner, profit-sharing ratio, interest on capital and drawings, salaries or commission, and the rules for admission, retirement, death and settlement of accounts.
Key points
- Essential features: two or more persons, an agreement, a lawful business, sharing of profits, mutual agency.
- Liability of partners is unlimited, joint and several.
- Minimum two partners; the maximum is 50 as prescribed under the Companies Act, 2013 rules.
- Rules when there is no deed (or the deed is silent):
- Profits and losses are shared equally.
- No interest on capital and no interest on drawings.
- No salary or commission to any partner.
- Interest on a partner's loan to the firm at 6% per annum, charged even if there is a loss.
Exam tips
Situation questions often describe a dispute ("A wants salary, B refuses") and ask which rule applies. Check first whether a deed exists and whether it covers the point; if not, apply the Act's provisions above.
Common mistakes
- Thinking the loan interest of 6% is an appropriation of profit. It is a charge against profit and goes to the Profit and Loss Account.
- Assuming profits are shared in the capital ratio when there is no deed. They are shared equally.