Understand the Clauses in the Partnership Deed to Clarify Your Role as a Partner
A partnership is an important aspect of any business when you decide to run an LLP or a Partnership firm. Knowing a partnership deed helps ensure that the company runs smoothly, and there is no conflict between the two of you. A partnership is a formal agreement between the business partners, designed in such a beneficial way for all the partners. The agreement clearly defines each business partner’s role by stating the percentage of profit/ loss shared between the business partners and the general partnership rules that each of them needs to follow. The amount of money withdrawn by the partners from the business capital should not exceed the amount mentioned in the partnership deed. Also, the money that they need to contribute to the business to run correctly is mentioned in the general rules.
However, the agreement for a business partnership made without bias and caters to each partner’s need. It is advisable to go through each of the clauses and understand them to know where your rights lie. It prevents yourself from signing the partnership contract where you are not satisfied with any of the clauses.
What Are the General Clauses That One Needs to Know Before Entering a Partnership Agreement?
Here is the rundown of all the general clauses essential for any partner to know and understand them. By knowing all these important clauses, you will be able to make a fair decision about company affairs:
- Contribution of money: The money contributed by each partner is an essential aspect of the agreement. Capital investment plays a significant role in running a business and needs to be the first thing to discuss. Investment is not all about the amount of cash you use for starting a business.
If one of the partners has helped to get a location for the physical address of the business without paying rent for that property, then getting an asset for the company will come under capital investment. It is an essential point that shall be included in the partnership deed. Each partner clearly states the amount of investment, whether in the form of cash or asset, and both are acceptable and included in the agreement.
- Distribution of returns among the partners: The main motive behind setting up of every business is to get some profit from it. It would be beneficial for the partners to know the different categories of return that they will be arriving after commencing the business. These returns are provided for different objectives:
- Percentage of profit: Business partners need to make a mutual decision regarding the percentage of profit they will share. It’s not necessary to have an equal share in the business. However, if they fail to mention the profit percentage in the agreement, the profit will be divided equally. Generally, the percentage of profit depends upon the amount of money contributed by each partner towards the business.
- Rate of interest on capital contribution: Partners investing in the business has the right to get some interest on the amount of capital they have invested. The agreed rate of interest ought to be mentioned in the partnership agreement. As per the guidelines of ITA (Income Tax Act), the interest rate cannot exceed 12% of SI (Simple Interest).
- Remuneration: The partnership deed also carries a section called remuneration that declares the benefits of active business partners. Remunerations provide to acknowledge their efforts in maintaining the operation and administration of the business. However, the remuneration cannot exceed beyond the limit provided by the Income Tax Act based on loss and book profit.
- Obligation and liberties: The intention of getting into the partnership for each partner can be distinct. The formulation of the partnership agreement happened so that the obligation and rights mentioned for each partner. It can be specific to their individual goals and the growth of the business.
- Privileges and authority: It is essential to outline the partner’s authority and privileges so that they are aware of their role while running the business. It could be possible that the powers of an active business partner are more than the inactive ones. Stating out such privileges and authority ensures that there is no conflict later.
- Responsibilities: Responsibilities assigned to different partners can be modified based on their choices and abilities. It should be made clear in the agreement that what all duties they have and the partners must avoid interfering unless there is a dire need. It is always good to trust your partner with his capabilities to handle his area of expertise.
- Solving the disputes: Everything seems to be working smoothly at the time of business commencement. However, as time passes, the partners may have to face certain disputes among them regarding business decisions, operations, and many unexpected events. Whether the dispute is big or small, it needs to be taken care of immediately in a sensible way. The business partners need to mutually decide the method of solving the dispute. Also, they need to ensure not to conflict with each other too much. Whether they want to go for a majority vote system or wish to appeal to the court or reach an arbitrator, everything needs to be mentioned in the partnership agreement.
Partnership Deed to Protect Partners
These are some of the significant clauses that need to be incorporated in the partnership deed. However, you can add other clauses to your agreement, like the nature of the business and the type of partnership. If you have already planned to register your business, you can get in touch with the 3E Accounting, known for handling all the business registration process. Our team will help you to build your business effectively and efficiently. Not only just that, but you can also get complete assistance for the partnership process, including doing a partnership deed. We will help you understand the process and formulate the partnership agreement. It is based on the mutual decision made by the business partners.