Partnership Deed in India: Registration, Clauses & LLP Comparison

A partnership deed is the constitution of a partnership firm. It records who the partners are, what each contributes, how profits and losses are shared, how decisions are taken, how partners may exit and how the firm will be dissolved. In Indian law, a partnership is governed by the Indian Partnership Act, 1932, and the Act applies to every partnership whether or not a written deed exists. That is exactly the problem: where there is no written deed, the Act's default rules apply, and those defaults are frequently not what the partners assumed.

This guide sets out the clauses a partnership deed must contain, the stamp duty and registration process, the tax and liability consequences of the structure, and when a limited liability partnership is the better choice.

What the Act Assumes If You Have No Deed

Section 4 defines a 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. Section 5 makes the mutual agency of partners the defining feature. Where the deed is silent, several defaults follow:

• Equal profit sharing. Section 13(b) provides that in the absence of a contract, partners share profits equally, regardless of how much capital each contributed. A partner who put in 90% of the capital and a partner who put in 10% share equally.
• No interest on capital. Section 13(c) provides that a partner is not entitled to interest on capital unless there is an agreement.
• Interest on advances. Section 13(d) gives a partner interest at 6% per annum on advances beyond the capital contributed.
• No salary or remuneration. Section 13(a) provides that partners are not entitled to remuneration for taking part in the business unless there is an agreement.
• Indemnity for extra expenses. Section 13(f) requires the firm to indemnify a partner for expenses incurred in the ordinary and proper conduct of the business.
• Unanimous consent for key decisions. Section 12 requires consent of all partners for a change in the nature of the business.
• No power to expel. Section 33 requires the authority in the deed to expel a partner, so without an express clause, expulsion is invalid.
• Dissolution on death. Section 42 provides that a firm is dissolved by the death of a partner unless the deed provides otherwise. This default destroys continuity for family firms.

A written deed exists to displace every one of these defaults with the arrangement the partners actually intend.

Essential Clauses in a Partnership Deed

Name, place and nature of business

State the firm name, the principal place of business and the nature of the business. If the firm will carry on more than one line of business, list each. A deed that describes the business narrowly can later be used to argue that a particular activity was beyond the firm's scope.

Capital contribution

Record the amount each partner contributes, in cash or in kind, and how additional capital will be raised. Specify whether contributions are in cash, property, equipment or intellectual property, and how in-kind contributions are valued. State whether partners are obliged to contribute further capital and on what notice, or whether additional funds will be treated as loans.

Profit and loss sharing ratio

Fix the ratio expressly. Where the ratio differs from the capital ratio, say so and explain the reason — for example, one partner contributes capital and the other contributes full-time management. The income tax rules require that the profit sharing ratio be specified in the deed, and the firm's assessment depends on it.

Remuneration and interest on capital

Specify whether working partners will be paid a salary or a commission, how much, and how it will be drawn. Specify whether interest will be paid on capital, at what rate and on what balance. Note that the Income Tax Act limits the deductibility of interest paid to partners and of remuneration paid to partners, so the rates and amounts should be set with that in mind.

Duties, powers and restrictions on partners

Define each partner's role. State which partners will be active and which will be sleeping or dormant partners. Section 12 restricts certain acts without unanimous consent — opening a bank account in the firm's name, borrowing money, and admitting a new partner. Add express restrictions on entering contracts above a threshold, hiring staff, and acquiring assets.

Admission, retirement, expulsion and death

State the procedure for admitting a new partner and whether existing partners have pre-emption rights on the retiring partner's share. Provide an express power to expel a partner, with the grounds — breach of the deed, misconduct, insolvency, conviction — and the procedure. Address what happens on death: whether the firm continues with the heirs as partners or whether the deceased's share is bought out, and on what valuation.

Valuation of a partner's share

Fix the method in advance: net asset value, a multiple of profits, or valuation by a named accountant. A deed that leaves valuation to negotiation at the time of exit produces disputes. Where the firm owns property, state whether it is to be revalued and how goodwill is treated.

Accounts, audit and banking

State the accounting year, who maintains the books, whether the accounts will be audited, the bank in which the firm's account will be maintained and who may operate it. Specify the drawing limits for each partner and the period within which accounts will be finalised and shared.

Dispute resolution

Section 44 provides for dissolution by the court on grounds including misconduct and persistent breach. But the deed should first provide a contractual mechanism: negotiation, then mediation or arbitration with a defined seat. Arbitration is usually preferable to litigation for partnership disputes because it is confidential and faster.

Non-compete and confidentiality

Restrict partners from carrying on a competing business while they are partners and, within limits, after they cease to be partners. Section 36 of the Partnership Act permits a partner to restrain another from carrying on a similar business after dissolution, subject to conditions. Post-exit restraints must be reasonable in time, geography and scope to survive scrutiny.

Stamp Duty

A partnership deed must be executed on non-judicial stamp paper of the value prescribed by the state. The value depends on the amount of capital contributed and, in some states, on whether the deed includes property. Rates differ substantially between states — some levy a fixed amount for deeds up to a capital threshold and a percentage above it. An under-stamped deed is inadmissible in evidence until the deficit and penalty are paid.

Where the partnership takes over a running business or brings in immovable property as capital, additional stamp duty may be payable as on a conveyance, and registration may become compulsory. Confirm the position in your state before execution.

Registration of the Firm

Registration of a partnership firm is optional under the Act, but the consequences of not registering are severe. Section 69 provides that an unregistered firm cannot enforce its rights in a court of law: it cannot sue a third party to enforce a contractual right, and a partner cannot sue the firm or another partner for his share or for accounts. The firm can still be sued by others, and it can defend proceedings. In effect, an unregistered firm is a defendant but not a plaintiff.

The registration process is administered by the Registrar of Firms in each state. The application, commonly in Form 1 under the state rules, is accompanied by the deed, the prescribed fee and the details of the firm, its partners and its place of business. On registration, the Registrar issues a certificate of registration and the firm is entered in the Register of Firms.

Changes after registration — admission of a partner, retirement, change of name or place of business — must be notified to the Registrar within the period prescribed by the state rules. Failure to notify means the change is not reflected in the register and cannot be proved against third parties.

Tax and Liability Consequences

A partnership firm is taxed as a separate entity at the rates applicable to firms, with the partners' shares of profit exempt in their hands to the extent provided. The firm must obtain a PAN and, where turnover exceeds the threshold, GST registration. Partners are taxed on remuneration and interest received from the firm.

The critical disadvantage is unlimited liability. Under Section 25, every partner is liable jointly and severally with all other partners for all acts of the firm done while he is a partner, and the liability is unlimited. A partnership firm's creditors can proceed against the personal assets of any partner. For businesses with significant third-party exposure, this is the single strongest reason to choose a limited liability structure.

Partnership Firm vs LLP

Common Mistakes

• No written deed at all. The Act's defaults apply, including equal profit sharing regardless of capital.
• No clause on continuation after death. The firm dissolves on a partner's death, forcing a winding-up.
• No valuation method. Exit becomes a negotiation with no fallback.
• Unlimited borrowing powers. One partner can bind the firm to debts without the others knowing.
• Not registering the firm. The firm cannot sue to recover its own dues.
• Not notifying changes to the Registrar. Retirements and admissions are not effective against third parties.
• Under-stamping the deed. Inadmissible in evidence when it matters most.
• Confusing the deed with the LLP agreement. An LLP requires a different agreement filed with the MCA under the 2008 Act.

Frequently Asked Questions

Is registration of a partnership deed compulsory?

Registration of the firm is optional, but an unregistered firm cannot enforce its rights in court under Section 69. Registration is strongly advisable for any firm that will enter contracts or extend credit.

Can a partnership firm have only two partners?

Yes. A partnership requires at least two partners. The maximum is 50 under the Companies (Miscellaneous) Rules as applied to partnerships, though the Act itself does not specify a maximum.

Does a partnership deed need to be registered with the sub-registrar?

Registration with the Registrar of Firms is separate from registration with the sub-registrar. A deed that creates an interest in immovable property may require registration with the sub-registrar and attract stamp duty as on a conveyance. Confirm in your state.

Can a minor be a partner?

A minor cannot be a partner in a firm but can be admitted to the benefits of partnership with the consent of all partners, under Section 30. The minor's share and liability are limited.

What happens if a partner wants to leave?

If the deed provides a retirement mechanism, follow it. If not, retirement requires the consent of all partners, or the partner can apply to the court for dissolution under Section 44 on specified grounds.

Drafting Support

Our drafting team prepares partnership deeds with capital and profit sharing schedules, powers and restrictions, retirement, expulsion, death and valuation clauses, and dispute resolution provisions, along with the Form 1 registration application and state-specific stamp duty guidance.