Most Indian partnerships begin with trust and a ₹500 template deed — and most partnership disputes begin exactly there. The deed is not paperwork for the bank; it is the constitution the partners will reach for on the worst day of the relationship, when a partner wants out, dies, underperforms or overdraws. Here are the clauses that decide whether that day is a procedure or a war.
Capital, and what capital buys
State each partner's contribution precisely — cash, assets (with agreed valuation), or skill — and, critically, whether capital carries interest and whether profit share follows capital. Ambiguity here breeds the classic dispute: one partner brought money, the other brought full-time effort, and three years later each believes they own "the real" business. Record future capital-call rules too: what happens when the firm needs more money and one partner cannot contribute.
Profit sharing and drawings
- Profit/loss ratio — explicitly, even if equal (absent a deed, the Partnership Act assumes equality regardless of capital)
- Working partner remuneration — amounts and the Income-tax Section 40(b) limits that make it deductible
- Interest on capital, if any (also capped for deduction under 40(b))
- Monthly drawing limits per partner, and what happens on overdrawing
- How and when profits are actually distributed versus retained
Roles, powers and the money rules
Name who manages what — purchases, banking, staff, sales — and set financial authority limits: transactions above a threshold (say ₹1–2 lakh), borrowings, guarantees, property dealings and new lines of business require written consent of all partners. Specify bank operation (jointly or singly, and up to what amount). Most partner betrayals are not dramatic fraud; they are unilateral decisions that the deed never prohibited.
Admission, retirement and expulsion
Define how a new partner enters (unanimous consent, valuation method, deed amendment), how a partner retires (notice period, settlement of capital and goodwill, timeline for payout — lump sum destroys firms; instalments preserve them), and whether and how a partner can be expelled for defined misconduct. Include a non-compete for outgoing partners, reasonable in area and duration, and be clear about use of the firm name.
Nine out of ten exit fights are about price. Fix the method now: net worth per last audited balance sheet plus an agreed goodwill formula (for example, one year's average profit), valuation by a named CA if disputed, and payment in defined instalments with interest.
Death and incapacity
Without a clause, death of a partner can dissolve the firm by law. Provide that the firm continues; the deceased partner's account is settled with heirs by the fixed valuation method; and whether heirs may be admitted is a fresh decision of surviving partners, not an automatic right. Consider partner insurance funded by the firm so the payout money exists when the clause is invoked.
Dispute resolution and housekeeping
- Arbitration clause — a named seat and a sole arbitrator mechanism keeps disputes out of decade-long litigation
- Books, audit rights and every partner's right of inspection
- Registration: register the firm with the Registrar of Firms — unregistered firms cannot sue third parties or enforce claims between partners in many situations
- Stamp duty per your state, and re-execution whenever terms change materially
How Aidwish helps
Aidwish drafts and reviews partnership deeds as part of its business structure stage — pressure-testing capital, exit, valuation and dispute clauses against the scenarios that actually break firms — and handles registration, PAN and bank formalities end to end.