Question

Mr.Ashok and Mr.Babu were two sole proprietors’ doing similar business. They were competing each other and in order to attract customers towards them, they indulged themselves in reducing price of their commodity. Consequently, their profit margin reduced and gradually were facing loss. One fine day they met each other and decided to do the business jointly as a partnership firm with the intention of avoiding competition and earn more profit. The smooth and successful running of a partnership firm requires a clear understanding among its partners regarding the various policies governing their partnership. The partnership deed (agreement in writing) serves this purpose. The partnership deed brings clarity to the partners with regard to profit/loss sharing, salary, interest on capital, drawings, admission of a new partner, etc. Though issuing a partnership deed is not mandatory, they both felt it is better to enter into a partnership deed to avoid any possible disputes and litigation among them in future. Hence, they approached an Auditor to draft a partnership deed for them. Assuming you are an Auditor, draft a partnership deed for their partnership firm.

Answer 1

Very nice story!!

But why have you uploaded it? What type of answer do you need?

Answer 2

Answer:

An agreement of cooperation between Mr. Asok and Mr. Babu's new partnership:

Process:

1. Choosing a name for your partnership firm
2. Construct a Partnership Agreement.

To be noted:

A partnership deed might be expressed orally or in writing.

In practice, an oral agreement has no meaning for tax purposes, hence the partnership agreement should be in paper.

A partnership deed must have the following components:

• The type of business to be run
• The date the business was founded
• The length of the partnership (whether for a set period of time or a specific project)
• The capital investment made by each partner
• The profit-sharing percentage amongst the partners.

Here are the additional clauses:

• Interest on the Partner's Capital and Interest on the Partners' Loan will apply to Drawings.
• A copy of the partnership deed, which must be drafted by the partners and stamped paper in accordance with the Indian Stamp Act, must be given to each partner.
• The partnership deed must specify the following:
• Rules to be followed in case of retirement, death, and admission of a partner
• Salaries, commissions, etc., due to partners, if any.
• Method of producing accounts and preparations for the audit
• Division of work and responsibility, or the tasks, powers, and obligations of each partner
• If the company is being registered, the Registrar of Firms should also receive a copy of the partnership agreement.

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