What is Partnership Agreement and ist contents?


The Partnership Agreement

Administration of a partnership is governed by a partnership agreement. A partnership relationship arises from contract which can be written or oral. A partnership agreement emanates from this requirement. Such an agreement sets out duties and responsibilities of individual partners. Once a partnership agreement is in place its terms can only be varied by consent of all partners.

Following are aspects which should be covered by a partnership agreement:

Capital contribution
How much capital should a partner contribute to the firm? Would capital be allowed to fluctuate or remain fixed?

Profit sharing
The agreement must stipulate how profits and losses are to be shared among partners. It may also prescribe whether or not some partners are guaranteed minimum profit shares.

Drawings
Whether or not drawings by partners will be allowed and if interest is to be charged on such drawings.

Salaries
The agreement should indicate whether salaries are to be paid to partners and amounts of such salaries, if any.

Interest on capital and current account balances
Whether such interest will be earned by partners and the rates of interest and which capital and current account balances will be used in computation of interest.

Loans from partners
Where a firm receives loans or advances extended by partners how would these be rewarded? Unless otherwise stated these will be treated as if they were from outsiders and interest will be paid on them.

Accounts
The agreement shall stipulate the beginning and the end of an accounting period. It shall also indicate whether accounts shall be audited.

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