Getting into a Partnership Agreement? See this Video First



What is a Partnership?

A partnership is formed when two or more persons come together for jointly carrying on some business. The Indian Partnership Act under Section 4 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

What Laws govern Partnership in India?

Partnership is governed by the provisions of the Indian Partnership Act, 1932  and as it is an agreement enforceable by law, it is also governed by the Indian Contract Act, 1872.

When we get into a partnership, our minds are flooded with numerous questions and concerns. One thing we want to avoid in partnership is conflict and dispute among partners, as any dispute will crumble down the partnership and would defeat the very objective of forming the same.

Hence, to mitigate chances of getting into conflict with partners in future, it is advisable that the 6 points discussed below are carefully thought about and discussed prior to getting into the partnership agreement.

6 key Points to be taken care of when entering a Partnership

  1. Number of partners- The minimum number of partners required for forming a partnership is obviously 2 and there is a statutory limit on the maximum number of partners. Section 11 of Companies Act, 1956 imposes a limit on number of partners. It states that in a banking business there cannot be more than 10 partners and in a non-banking business there cannot be more than 20 partners. If the number of members in any association exceeds the specified limit then the business would be registered as a Company under the Companies Act, else it would be considered as an illegal association.
  2. Contribution of each partner- This is an essential factor which shall be certainly deliberated before getting into partnership as it will determine the ratio in which each partner will contribute towards the capital, resources and efforts of the partnership business and what would be done in case additional contributions are required towards the partnership business in future.
  3. Share of Profits and losses- This factor is an inevitable aspect of partnership and should be exclusively mentioned in the agreement. This point will determine the percentage in which profits will be shared among the partners and similarly in what percentage the partners will bare loss if any.
  4. Decision Making Mechanism- This factor implies that the partners shall before entering into agreement decide as to how decisions would be made in the partnership business particularly for important matters. Like will there be a voting system to reach a decision or decisions would be done unanimously. Because having locked horns on any subject could be a cause leading to a conflict between partners and eventually may also cause dissolution of partnership in some cases.
  5. Death of a partner- This is a very important clause which should be there in the partnership agreement i.e. what will happen in the event of death of a partner. Section 42(c) of the Partnership Act states that if there is no agreement pertaining to this point then in case of death of partner, partnership would automatically dissolve. Hence, it is advisable to discuss this clause at the time of entering into partnership itself.
  6. Resolving of Disputes- It is a very important clause of partnership agreement. Just in case there is a tussle or conflict between the partners then what course of action shall be adopted in the event of dispute between partners? These days it is advisable that disputes are resolved through arbitration and mediation as they are less time consuming and a cost-effective remedy. So in the partnership agreement itself you can have a clause stating that in case of any dispute between partners the disputes would be resolved through arbitration mode.