What is a Partnership Firm ?

It is a form of business organization which is owned and controlled by two or more persons who jointly contribute to the funds required for the conduct of business. A partnership firm can be formed with minimum of 2 and the maximum of 20 persons. Partnership refers to the relation of principal and agent among the partners. Each partner represents the other partners in his dealings with the third parties and acts as their agent. In his capacity as agent, each partner minds the other partners with his commitments or liabilities contracted on their behalf. In Indian, partnership firms are governed by the Indian Partnership Act, 1932. Under this Act, it is not compulsory to register the partnership firm. There is however, only one formality, i.e. the partners has to decide the terms and conditions on which they agree to conduct their business jointly with other partner/partners. This agreement of partnership is called “partnership deed”. The agreement can be oral or written. It is preferable to have partnership deed in written form. It is prepared on a stamp paper of Rs. 15 and should preferably be attested by a notary public, though it is not a legal requirement. The partnership deed generally covers the following points:

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  • Amount of capital to be contributed by each partner.
  • Profit-loss sharing ratio of the partners
  • Division of responsibilities/functions
  • Liability of the partners
  • Payment of interest on loan given by the partner/his or her spouse
  • Arbitration for settlement of any disagreement over interpretation of clauses in the deed of partnership.
  • Settlement mechanism in the event of retirement or death or admission of new partner
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