Partnership Agreements in India: Why Your Business Dream Needs a Rulebook

You know the scene. It’s a familiar story in India’s entrepreneurial landscape. Two friends, fuelled by chai and a big idea, decide to go into business together. One is the tech wizard; the other is the people person. There’s excitement, there’s trust, and there’s a verbal agreement sealed with a handshake. “We’ll figure it out as we go,” they say. “Fifty-fifty.”

It feels right. It feels… human. But fast-forward a year. The business is growing, but so are the questions. Who put in more money for that emergency expense? Should we hire an assistant? One partner wants to reinvest every penny, while the other needs a salary. That warm, fuzzy feeling of partnership starts to chill under the pressure of unanswered questions.

This is where the unglamorous but utterly essential Partnership Agreement comes in. It’s the failsafe before you need it. It’s not a sign of distrust; it’s the ultimate act of respect for your partner and your shared vision. It’s what turns a hopeful handshake into a resilient business.

So, What Is This Agreement, Really?

You can consider it your company’s own constitution. All of the “what ifs” are addressed in this official, written contract between the company’s managers before they turn into “what nows?”

The Indian Partnership Act of 1932 largely establishes the rules of the game in India. According to this ancient yet valuable law, a partnership is “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.”That last part is crucial as it means each partner is an agent for the business and can bind the entire partnership with their actions. A well-drafted agreement does the heavy lifting:

• It defines who owns what.
• It spells out how profits (and losses!) are shared.
• It clarifies everyone’s role, so you’re not stepping on each other’s toes.
• It provides a roadmap for what happens if someone wants to leave, or if you sadly have to part ways.

Without it, you’re defaulting to the standard rules of the Partnership Act, which might not be what any of you actually wanted.

The Legal Backdrop: To Register or Not to Register?

Here’s a critical detail many miss: a partnership can exist the moment you and your partner start a business with a profit-sharing motive. You don’t have to register it. And this is a massive butan unregistered partnership that faces serious legal handicaps.

As per Section 69 of the Partnership Act, 1932, an unregistered firm cannot file a lawsuit in any court to enforce a right arising from a contract. This means if a client doesn’t pay you, you can’t sue them. Even more critically, you can’t sue your own partners in a dispute. It’s like trying to fight with one hand tied behind your back.

In contrast, registering with the Registrar of Firms is a simple procedure. It provides your partnership with legal personality, which makes it much simpler to legally own property, bring legal action against third parties, and settle internal conflicts. It goes without saying that any business that is more than a side project should register.

Choosing Your Structure: It’s Not One-Size-Fits-All

Partnerships in India aren’t all the same. The structure you choose has huge implications for your personal risk.

1. The General Partnership (Under the Partnership Act, 1932): This is the classic model. It’s simple to set up and operate.

The Big Risk: Unlimited Liability. This is the scary part. If the business runs up debts it can’t pay, creditors can come after the partners’ personal assets like their house, their car, their savings. It’s a lot of trust to place in each other’s financial decisions.

Best for: Very small, low-risk businesses where partners have an extremely high level of trust, like a small local consultancy or a boutique store.

2. The Limited Liability Partnership (LLP) (Under the LLP Act, 2008): This is the modern, safer alternative that has become incredibly popular.

The main attraction: limited liability. The partners’ liability is capped at what they contributed to the LLP, as the name implies. Business failures do not affect your personal assets. It combines the adaptability of a partnership with a corporate structure.

The Catch: As compared to a general partnership, registering with the Ministry of Corporate Affairs (MCA) is required, and it entails a lot more paperwork and compliance.

Best for: It is recommended for Startups, professional firms (like CA, legal, or architectural firms), and any business where the risk of liability is a real concern.

3. Partnership at Will: This is a general partnership with no fixed duration. It continues as long as the partners want it to and can be dissolved by any partner simply by giving notice. It’s flexible but inherently unstable.

4. Particular Partnership: This is formed for a single project or a specific time period. Once the project is completed or the time elapses, the partnership automatically dissolves. Think of two builders coming together for one housing project.

Building Your Rulebook: The Clauses You Can’t Skip

A strong partnership agreement goes far beyond just profit-sharing. Here’s what should be in yours:

• The Business Details: Start with the basics, like the official name of the firm and a clear description of the business you’re in.
• Capital Contributions: This is where you get specific. Who is putting in how much cash, property, or assets? Is it a 50-50 split? 60-40? Be precise. Also, outline the process for bringing in more capital later if needed.
• Profit and Loss Sharing: The default under the Act is equal sharing. It comes regardless of the capital contribution. But you can agree to any ratio. Maybe the partner who works full-time gets a larger share than the silent, investing partner. Spell it out.
• Roles and Responsibilities: Who is the face of the company? Who manages the books? Who signs the cheques? Defining roles prevents overlap and conflict. Clarity here is a gift to your future selves.
• Decision-Making: How are big decisions made? Unanimously? By a majority vote? What constitutes a “big” decision (e.g., taking a loan, hiring a key employee)? This prevents one partner from making a huge decision that affects everyone else unilaterally.
• Salaries and Drawings: Will partners take a regular salary or just wait for the profit share at the end of the year? Can they take occasional drawings? This is a common point of friction.
• Admitting a New Partner: What’s the process if you want to bring in a third partner? Does it require unanimous consent?
• The most crucial component is the exit strategy: what happens if one partner decides to retire, gets incapacitated for good, or dies? How is the value and distribution of their share determined? A well-defined “prenup” for the company prevents future legal disputes and a great deal of heartache.
• Dispute Resolution: Instead of heading straight to the overburdened courts, include a clause for arbitration or mediation. It’s faster, cheaper, and private.
• Non-Compete Clause: It’s reasonable to agree that a partner who leaves won’t immediately set up an identical business next door, using the contacts and secrets they learned.

Learning from the Best (and the Worst)

We all know the legendary story of Infosys. When N.R. Narayana Murthy and his six co-founders started in 1981, their early relationship was fundamentally a partnership. While they soon incorporated as a private limited company, their initial clarity on equity, roles, and vision was what held them together through immense challenges. They had, in essence, the spirit of a great partnership agreement.

On the flip side, India’s business history is also littered with tales of thriving family businesses that splintered and collapsed because the second or third generation had no clear agreement on how to manage their shared inheritance. The court cases that follow can drag on for decades, draining wealth and destroying relationships.

The Tax Man Cometh: Understanding the Implications

General Partnerships & LLPs: Both are treated as “firms” under the Income Tax Act, 1961. The firm itself pays tax on its profits (at around 30%), and then the partners pay tax on their share of the profit again in their individual hands. This is called “pass-through” taxation, but there is a level of double taxation. However, there’s no dividend distribution tax, which can be an advantage over private limited companies for smaller entities.

The Final Word: Trust, But Verify

A partnership is a beautiful thing. It’s about combining strengths to build something neither of you could do alone. But hoping for the best is not a strategy. The strongest partnerships are built on a foundation of clear communication, which is exactly what a partnership agreement is.

Your action plan:

• Have the tough conversations now. Talk about money, exit plans, and worst-case scenarios while you still like each other.
• Write it all down. Don’t rely on memory.
• Get it registered, especially if you’re opting for an LLP.
• Review it annually. As your business grows, your agreement should evolve with it.

In the end, a partnership agreement isn’t about preparing for failure. It’s about ensuring your success both as business partners and as friends or family. It’s the paper that protects the trust.

Author Details: Apoorva Lamba (3rd Year Student, Madhav Mahavidyalya, Jiwaji University, Gwalior)