Partnership and the deed

Section 4 of the Indian Partnership Act, 1932 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'. So partnership is a relationship. The people in it are partners, together they form a firm, and the name under which they do business is the firm's name.

Its features:

• Two or more persons: at least 2, and at most 50 (the limit is set by the Companies Act and its rules, not the Partnership Act).
• An agreement between them, written or oral.
• A business, run for profit.
• Mutual agency: the business may be run by all of them or any of them acting for all, so each partner is both a principal and an agent of the others.
• Sharing of profits (and losses).
• Unlimited liability: partners are personally responsible for the firm's debts.

The written agreement is the partnership deed, usually on stamp paper (the stamp duty varies from state to state). A partnership can exist without a deed, since an oral agreement is valid, but a deed is always wise: with everything written down, disputes are easy to settle. It covers the capital each partner brings, the profit sharing ratio, interest on capital and drawings, salaries, and rules for admission, retirement and dissolution.

If there is no deed, or the deed is silent on a point, the Act's rules apply. Five matter in accounting:

• Profits and losses are shared equally.
• No interest on capital is allowed.
• No interest on drawings is charged.
• No salary, commission or other remuneration is paid to any partner.
• A partner who lends money to the firm gets interest at 6% per annum on the loan.

Note the last one: interest on a partner's loan is a charge against profit, an expense of the business, so it goes to the Profit and Loss Account, not the Appropriation Account.