Last updated: July 17th, 2023 9:08 AM

Is it mandatory to form a partnership deed?

It is not mandatory to form a partnership deed in India under the Indian Partnership Act of 1932. However, it is recommended to have a written partnership deed as it helps avoid any disputes or misunderstandings between the partners by establishing the terms of the partnership, such as the capital contribution of each partner, the profit-sharing ratio, and the rights and rights obligations of each partner. What are the types of partnership deeds?

Partnership Deed

A partnership deed is a legal document outlining the partnership's terms and conditions, including the partners' rights and obligations, profit-sharing ratio, each partner's capital contribution, and duration.

• The partnership deed is a crucial document that helps avoid misunderstandings and disputes between partners, as it clearly defines the roles and responsibilities of each partner. 
• It also serves as evidence of the existence of the partnership and can be used in legal proceedings in case of disputes.

The Indian Partnership Act of 1932 provides that a partnership can be incorporated without a written deed. The act recognizes both written and oral agreements as valid partnerships. However, it is always advisable to have a written partnership deed to avoid any disputes or misunderstandings in the future. Rights and Duties of Partners in a Partnership Firm

A consequence of not forming a partnership deed

Not forming a partnership deed in India can have several consequences:

• Lack of clarity: Without a partnership deed, there is no clarity on the terms of the partnership, such as the capital contribution of each partner, the profit-sharing ratio, and the rights and obligations of each partner. This can lead to misunderstandings, disputes, and even the dissolution of the partnership.
• No legal recognition: A partnership without a registered partnership deed does not have legal recognition. This means the partnership cannot sue or be sued and cannot enter into contracts or own property in its name.
• Unlimited liability: In an unregistered partnership, each partner has unlimited liability for the debts and obligations of the partnership. This means the partners' personal assets can be used to pay off the partnership's debts.
• Inability to obtain loans and credit: Banks and financial institutions may require a registered partnership deed as proof of the existence of the partnership before granting loans or credit.
• Difficulty in obtaining licenses and permits: A registered partnership deed may be required to obtain licenses and permits for the business.

Therefore, it is highly recommended to form a partnership deed in India to avoid these consequences and ensure the smooth functioning of the partnership business.

Registration of partnership deed

On the other hand, it is not compulsory to register a partnership deed. A partnership can be legally valid even if the deed is not registered. However, registering the partnership deed provides legal recognition to the partnership. It offers several benefits, such as establishing the existence of the partnership, protecting the partners' interests, and limiting the partners' liability. The Registration of the partnership deed is done with the Registrar of Firms. In summary, while it is not mandatory to form a partnership firm registration under the Indian Partnership Act of 1932, it is recommended to have one to establish the terms of the partnership and avoid any disputes or misunderstandings between the partners. IndiaFilings provides end-to-end assistance in forming a partnership deed by offering consultation, drafting, registration, compliance, and amendment services, making the process simple, easy, and hassle-free for the partners.