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Drafting a Partnership Agreement. Important clauses to be included

March 27, 2018

 

Entering into partnership is the simple way of doing business together. With lesser compliances when compared to companies, partnership business is the most sought after business model. Before you even plan your financing needs and start accounting your first transaction, you must draft a partnership deed and get it registered. Here are the 12 main clauses which are to  be included in your deed.

 

1) NAME OF PARTNERSHIP AND NATURE OF BUSINESS: First comes the name of your partnership firm. Choosing a business name for your partnership firm is an important task. You have to ensure that the name is not identical with other existing business names. The name has to represent the business you are doing. For example, if You are into logistics business, Your business name could be Ace Logistics, P.R Logistics and so on. Hence Your trade name and Your business should actually have a connection.

 

Then comes the nature of business. Nature of business is the general category of your business. If you are in the business of transporting goods from one place to another, then you are said to be in logistics business.  

 

2) COMMENCEMENT AND TENURE OF BUSINESS: Here you state the date on which the partnership has been commenced.and specify the tenure. A partnership business can be entered into with or without specifying a fixed term. The later is called the partnership at will. Alternatively, your partnership can specify fixed term, where the partnership is dissolved after the expiry of the fixed term. In the case of partnership at will, the partnership is carried on without defining any fixed period and dissolved at the will of any partner.

 

3) CAPITAL CONTRIBUTION BY PARTNERS: In this clause, you specify the amount of capital contributed by every partner entering into partnership. The amount of capital to be contributed will be as per the agreement between the partners.

 

4) PROFIT SHARING RATIO OF PARTNERS: Profit sharing ratio is the ratio in which the profit or loss made by the firm are distributed among partners. Partners can agree upon this ratio based on their mutual agreement. For Example, If Anitha and Vanitha are partners in a firm, their profit sharing ratio could be 5% and 95% or 50% and 50%. Just that it has to be mutually agreed upon. Partners could also contribute capital in their profit sharing ratio although, it is not mandatory.

 

5) DRAWINGS BY PARTNERS: Every partner in the partnership firm can take out money from the partnership business to meet his personal expenses. A drawing account is generally maintained for every partner and is regulated to make the partner accountable for his drawings. Partners may also agree to charge interest on the amount drawn. This interest will be treated as income for the firm. Hence, terms relating to drawings and interest on drawings can be specified in the partnership deed.

 

6) REMUNERATION OR SALARY TO PARTNERS: Partners can be paid salary or remuneration. The amount of salary or remuneration paid has to be specified in the partnership deed. But it has to be ensured that the remuneration does not exceed the limits specified in the Income Tax Act, 1956 as the excess amount will not be allowed as deduction while computing the tax liability.

 

7) INTEREST ON CAPITAL: The firm may agree to pay interest on capital contributed by partners. However, the rate of interest must not exceed the limit specified in the Income Tax Act, 1956 to claim deduction of interest expense. If the amount exceeds the limit specified, the interest expense cannot be claimed as a deduction.

 

8) RENT ON PREMISES: The amount of rent if any, to be paid to the partners, whose premises are used for business will be mentioned in this clause.

 

9) IN CASE OF DISPUTE AMONG PARTNERS:  In case if there are any dispute among the partners, this clause may state the procedure to resolve the dispute. This may also state the procedure to appropriate (allocation) profits in case of dispute.

 

10) ACCOUNTS AND AUDIT: The procedure for maintenance of accounts and audit shall be specified in this clause.

 

11) GOODWILL: Valuation of goodwill in case of admission of new partner, retirement or death of a partner.

 

12) DISSOLUTION: Procedure for dissolution of partnership is mentioned in this clause.

 

 

 

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