Which terms should a partnership deed set out?
A partnership deed should set the profit share, the capital, any salary, and any interest on capital. If it does not, section 13 of the Partnership Act fills the gaps: profits are equal, no partner is paid a salary for working in the firm, and interest on capital is paid only out of profits. Those defaults bind the partners between themselves. They do not limit what the firm owes to outsiders.
What applies if the deed is silent?
Section 13 applies subject to the contract between the partners. Where the deed says nothing:
- Partners share profits equally and contribute equally to losses.
- A partner is not entitled to interest on capital before the accounts are drawn, and then only out of profits.
- A partner who advances money beyond the agreed capital is entitled to interest at 6 percent a year.
- A partner is not entitled to remuneration for taking part in the business.
What a deed is, how it is stamped, and why registration of the firm is optional, is on the partnership deed page. This page is the list of terms that replace the defaults.
Which terms stop a later dispute?
The deed names the firm, the partners, and the business, and then writes the points section 13 would otherwise decide.
- Capital of each partner, and whether further capital needs everyone’s consent.
- The profit and loss ratio, if it is not equal.
- Drawings, and any interest charged on them.
- Salary or remuneration, if any partner is to be paid.
- Who may sign for the firm, and any limit on borrowing.
- How a partner retires or a new partner is admitted, and how goodwill is dealt with on that day.
A later change is a supplementary deed. The steps are on the amendment page.
Does the deed limit liability to outsiders?
No. Every partner is jointly and severally liable for the acts of the firm. A clause that says a partner is liable only up to capital does not bind a creditor. A retiring partner gives public notice. Without it, people who knew that partner as a partner of the firm can still treat the partner as liable for later acts.
Is an LLP the same as a firm?
No. A firm is the Partnership Act. An LLP is a separate body under the LLP Act, with its own agreement and its own filings. Calling a firm a limited partnership in the deed does not create an LLP. More than 50 partners cannot carry on business as a firm. That business has to be a company or an LLP.
Frequently asked questions
Four questions cover equal profits, a liability cap, a limited partnership, and retirement.
Are profits equal if the deed does not say?
Yes. Section 13 shares profits equally, and losses equally, unless the deed sets a different ratio.
Can the deed make partners liable only up to their capital?
Not against outsiders. Partners of a firm are jointly and severally liable for the firm’s acts. A cap of that kind needs an LLP, which is a different entity.
Is a US-style limited partnership an Indian firm?
No. An Indian firm is under the Partnership Act, 1932. Limited liability for every partner is the LLP Act, 2008, not a clause in a firm’s deed.
Does a retiring partner need to give notice?
Yes. Without public notice, a retiring partner can remain liable to third parties who dealt with the firm and did not know of the retirement.
Sources
The defaults are section 13 of the Partnership Act, 1932. An LLP is a different Act.