The Clauses That Matter in a Partnership Deed

Guide

What the deed is for

A partnership can exist without a written deed, and where there is none, the relations between the partners are governed by the Indian Partnership Act, 1932, and by whatever can be proved about what they agreed. That is a poor position to be in, because what the Act supplies by default is rarely what the partners would have chosen.

The deed's function is to displace those defaults deliberately. Every clause worth having in it is a clause answering a question that would otherwise be answered either by the statute or by a court, on evidence, years later.

Capital, profits and drawings

What each partner contributes, in what form, and whether it is capital or a loan to the firm are distinct questions with distinct consequences. A contribution of premises or equipment rather than cash should be valued and recorded as such.

Profit shares are commonly stated and losses commonly forgotten; they do not have to be shared in the same proportion, but if the deed is silent about losses the position may not be what one partner assumed. Interest on capital, remuneration for partners who work in the business, and what may be drawn and when are all matters that should be settled rather than left to practice.

• What each partner contributes, and whether it is capital or a loan
• How profits are shared, and how losses are borne
• Whether interest is payable on capital or on loans by partners
• What remuneration working partners receive
• What may be drawn, how often, and what happens if drawings exceed entitlement

Management, authority and decisions

Who runs the business day to day, what any one partner may commit the firm to without the others, and which decisions need everybody's agreement are the clauses that matter most when partners disagree about direction. A deed that says nothing about this leaves each partner with broad authority to bind the firm, which is not usually what anyone intends.

It is worth identifying the decisions that should require unanimity — borrowing, giving security, admitting a partner, disposing of a substantial asset, changing the nature of the business — and saying so, rather than discovering the point when one partner has already acted.

Exit, retirement, death and expulsion

This is where deeds most often fall silent and where silence costs the most. What happens when a partner wants to leave, dies, becomes unable to continue, or has to be removed should be dealt with while everyone is content that the answers are fair.

The hardest part is valuation. A clause that says a departing partner is to be paid the value of their share, without saying how that value is arrived at, has moved the dispute rather than avoided it. Say how the firm is to be valued, who is to do it, and over what period the payment is to be made.

• Notice required to retire, and what happens on death or incapacity
• Grounds on which a partner may be expelled, and the procedure
• How a departing partner's share is valued, and by whom
• Over what period the outgoing share is paid out
• Whether the firm continues or is dissolved on a partner leaving
• What restrictions, if any, apply to a departing partner afterwards

Disputes, dissolution and accounts

A dispute-resolution clause is worth having, and worth drafting properly rather than copying. Where arbitration is chosen, the clause should be capable of working — the number of arbitrators, the manner of appointment and the seat all matter, and a defective clause produces a preliminary dispute about the dispute.

Dissolution should also be provided for: what triggers it, how the business is wound up, who realises the assets, and in what order the proceeds are applied. And the deed should say who keeps the books, what accounting period the firm follows and what right each partner has to inspect the records, because a partner who cannot see the accounts cannot tell whether anything is wrong.

Registration of the firm

Registration of a partnership firm under the Indian Partnership Act is a separate step from executing the deed, and it carries consequences for the firm's ability to bring proceedings. The particulars registered should match the deed, and changes made later — a new partner, a change of business or of address — need the register to be updated too.

Whether registration is required or advisable in a particular case, and what it entails, should be confirmed for the firm concerned rather than assumed from another firm's experience.