Partnership Deed Checklist: 12 Clauses to Discuss Before Signing

Section 11 of the Indian Partnership Act, 1932 lets partners decide their mutual rights and duties by contract. The deed is that contract. Wherever it is silent, the Act fills the gap with default rules written for a generic firm. Most disputes between partners are not about fraud. They are about a question nobody asked at the start: who decides, who is paid, and what one partner takes away on leaving.

The twelve clauses below are the questions to answer together. For each, this guide notes what the Act provides if you say nothing. If you are still deciding between a partnership and a proprietorship, read the comparison of the two first.

1. How much capital does each partner bring, and what happens when more is needed?

Record each partner's contribution, whether it is cash, property or something else, and its agreed value. Then decide what happens when the business needs more: whether every partner must contribute in proportion, whether a partner may lend instead, and on what terms.

2. How will profits and losses be shared?

State the ratio for profits and say whether losses follow the same ratio. Partners who contribute unequal capital or unequal time often want different ratios, and that is fine, as long as it is written down.

3. Who does what, and who can bind the firm?

Describe each partner's role and responsibilities, and how decisions are made: which matters need a majority, which need everyone. Then deal with authority to the outside world. Every partner is an agent of the firm, and an act done in the usual way of the firm's business binds the firm (section 19). The deed can restrict a partner's authority (section 20), but a restriction does not bind a third party who does not know about it.

4. What are the spending limits and approval rules?

Agree a figure above which a single partner cannot commit the firm without the others: a purchase, a contract, a hire, a loan, a guarantee. Name the decisions that always need everyone, such as borrowing, buying property, giving guarantees or taking on a new line of business. This is the clause that most often prevents a dispute rather than resolves one.

5. Drawings, remuneration and interest: who is paid what?

Decide whether working partners draw a salary, how much partners may withdraw against their share of profit and how often, and whether capital earns interest. Write the method, not just the amount, so it still works when profits change.

6. How will the firm's money be controlled?

Decide which bank the firm will use, who the signatories are, and whether payments above a set amount need two signatures. Agree who keeps the books, who prepares accounts and when, who the auditor or accountant will be, and how often partners review the figures. Every partner has the right to have access to and to inspect and copy any of the books of the firm (section 12(d)), so build that into how the books are kept rather than treating it as a concession.

7. Who owns the firm's intellectual property and information?

State that the firm's name, brand, designs, software, customer lists and know-how belong to the firm, not to the partner who created them. Say what happens to them when a partner leaves. Add a confidentiality clause. Decide whether partners may run other businesses while they are partners: section 11(2) allows the deed to say a partner will not carry on any business other than that of the firm.

If a partner makes a profit from a transaction of the firm, or from using its property or business connection, section 16 requires them to account for it to the firm. A restraint on an outgoing partner competing after leaving is valid under section 36(2) only if it is reasonable, limited to a specified period or local area.

8. How can partners join, retire, be expelled, or be replaced on death?

• Admission. Section 31: a new partner can be introduced only with the consent of all existing partners, unless the deed says otherwise. Decide whether a majority should be enough.
• Retirement. Section 32: a partner can retire with the consent of all, by express agreement, or, in a partnership at will, by written notice. Set a notice period and the steps that follow.
• Expulsion. Section 33: a partner can be expelled only under a power given by the deed, exercised in good faith. With no such clause, there is no expulsion.
• Death. Section 42: subject to the deed, the death of a partner dissolves the firm. If the surviving partners should carry on, the deed must say so and set out how the deceased partner's share is dealt with.

9. How will a departing partner's share be valued and paid?

Agree the valuation method in advance: book value, a multiple, an independent valuer, and whether goodwill is included. Set the payment period, whether instalments carry interest, and the date at which the valuation is struck.

10. How will disagreements be resolved?

Set a sequence: discussion between partners, then mediation, then arbitration, with the seat and the number of arbitrators named. An arbitration agreement has to be made deliberately. A single partner's implied authority does not include submitting a firm dispute to arbitration (section 19(2)(a)), so the clause belongs in the deed, agreed by all.

11. When does the firm end, and when does it continue?

State whether the firm is for a fixed term, for a particular venture, or at will. A firm for a fixed term is dissolved when the term expires, and one formed for a venture when it is completed, unless the deed provides otherwise (section 42). Write a continuity clause covering death, retirement and insolvency of a partner, so the business does not end by accident. Then set out how a dissolution is wound up: who collects debts, how assets are sold, and the order in which liabilities and capital are repaid, which otherwise follows section 48.

12. How is the deed amended, signed and registered?

• Amendments. Require any change to be in writing and signed by all partners.
• Stamp duty. The deed is executed on stamp paper of the value required in the state where it is signed. In Gujarat the amount follows the Gujarat Stamp Act and depends on the capital involved.
• Signatures and witnesses. All partners sign, usually with witnesses. Many banks and authorities also ask for a notarised copy.
• Registration. Registering the firm with the Registrar of Firms is optional under the Act, but section 69 stops an unregistered firm from suing a third party to enforce a contract, and stops partners of an unregistered firm suing the firm or each other on the partnership contract. Changes in the firm must be notified to the Registrar after registration.

A checklist to work through before drafting

When should you take legal advice?

Take advice before signing if any of the following apply: partners contribute property rather than cash, partners are related and family property is involved, one partner will be passive, a partner is a company or LLP, the firm will borrow significantly or give guarantees, or you want restrictions on competition after a partner leaves. In each of those the generic answer is likely to be wrong for you.

Raulji Group advises on the terms a deed should cover and drafts the deed as part of partnership firm registration, including the stamp duty and the filing with the Registrar of Firms.