What is a Partnership?

A partnership is like a bond between individuals who get together to operate a business. It is a legal form of business organization to earn a profit. All small and medium-sized businesses prefer Partnerships as they offer an efficient foundation and flexibility. 

The key to a successful partnership is a carefully plotted partnership deed in accordance with the Partnership Act of 1932. Strong and healthy communication among the partners is a key stepping stone to long-term business. If you are planning to get into a partnership, apart from establishing a good rapport with your partners, keep in mind that you should seek legal guidance and compliance. 

Right now, we are here with this blog to help you understand the key concepts of partnership. 

 

What are the key characteristics of a Partnership?

The partnership between individuals starting an enterprise is not a piece of cake; if the foundation is not based on trust and clarity, the whole bond will break. Before jumping the gun, each member needs to be clear about the significant characteristics of the partnership and the business. 

The key characteristics of a partnership are:

• Agreement: There must be a mutual agreement between all the partners with a clear and documented set of rules. All the profit-sharing ratios and responsibilities should be outlined in the agreement. 
• The number of partners: According to the Indian Partnership Act of 1932, a partnership must have a minimum of two partners and can have a maximum of 20 partners. 
• Profit-sharing ratio: All the partners should have a pre-decided ratio for profits and losses, which must be documented.
• Unlimited liability: All the partners have unlimited liability in a general partnership, which leads to the personal assets being used to settle the business. 
• Mutual Agency and Trust: All the partners are agents for the partnership and have an equal impact on the business, which makes trust among them an essential tool. 
• One legal entity: The partners and the business are considered one legal entity and not separate like companies. 

 

What are the key types of Partnerships?

The history of partnership dates back to medieval times in Europe and the Middle East. The early merchants of Florence, from 1383, implemented the first-ever partnership agreement. This gradually came to light, and people from different nations adopted the partnership system. Since then, the partnership has been through many reforms and regulations. 

The key types of partnerships are: 

1. General Partnership 

• The partners participate actively in the business management.
• Every partner possesses unlimited liability, where all their personal assets are at stake in times of financial distress. 

2. Limited Partnership (LP) 

• A limited partnership is a partnership with general partners managing the operations and limited partners managing the business with limited liability. 
• The origin of LP dates back to the 19th century. 
• The limited partners here contribute to the capital, and their liability is limited to their investment.

3. Limited Liability Partnership 

• All the partners here possess some form of limited liability
• The partners’ assets are not liable for any business losses or mishaps.
• Lawyers, consultants, and accountants mostly use the LLP.

4. Partnership at Will 

• The partners start a venture without any terms or conditions
• There is no fixed duration
• All the partners come together for a project and can dissolve the agreement at any time.

 

What are the advantages and disadvantages of Partnership?

The partnership comes with pros and cons. On the one hand, the partnership provides creative freedom to the partners; however, it also comes with unlimited liability. 

The key advantages and disadvantages of Partnership are tabulated below: 
 

Advantages of Partnership	Disadvantages of Partnership
Easy registration process	Unlimited liability
Less legal formalities	Partners are responsible for losses
Diversity in skills and resources	A partnership may dissolve at any inconvenience
Quicker decision-making	Partners are prone to conflict
Simplified compliance and tax benefits	Disagreement can happen easily
Shared responsibility	Lack of asset security

 

How to Draft a Partnership Deed? 

Drafting the partnership deed is crucial in forming a partnership firm, keeping the dispute to a minimum, and ensuring clarity. 

Here’s a step-by-step guide on how to draft a partnership deed:

 

Step 1: Choose a Partnership Name

Step 2: Specify the Business Details

Step 3: Include Partner Details

Step 4: Define Capital Contributions

Step 5: Profit and Loss Sharing Ratio

Step 6: Describe Roles and Responsibilities

Step 7: Include Clauses for Key Terms

Step 8: Add Additional Terms (if necessary)

 

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Frequently Asked Questions (FAQs)

What are the Partnership Deed contents?

Below are the key contents of the partnership deed: 

• Names and addresses of partners
• Nature of business 
• Date of commencement
• Capital contribution
• Profit and loss sharing ratio
• Roles and responsibilities of partner

Can a partnership deed be amended?

A partnership deed can be amended with the partners' agreement. 

What is the key to a successful partnership? 

The key to a successful partnership is a carefully plotted partnership deed in accordance with the Partnership Act of 1932. Strong and healthy communication among the partners is a key stepping stone to long-term business.