Partnership Deed for Service-Based vs. Product-Based Businesses

Partnership Deed for Service-Based vs. Product-Based Businesses

A Partnership Deed is a crucial document that defines the terms and conditions of a partnership firm. Whether you are setting up a service-based business (like consultancy, IT services, or legal firms) or a product-based business (like manufacturing, retail, or trading), the clauses in your partnership deed need to be carefully drafted to suit your business model.

In this post, we will explore the key differences in partnership deeds for service-based and product-based businesses, helping entrepreneurs in Rajasthan and across India draft effective agreements.

What is a Partnership Deed?

A Partnership Deed is a written legal document that outlines the rights, responsibilities, and obligations of partners in a business. It helps prevent disputes and ensures smooth operations.

Why is a Partnership Deed Important?

  • Defines roles and responsibilities of partners
  • Specifies profit-sharing ratios
  • Reduces conflicts and legal complications
  • Provides clarity in business operations

Now, let’s discuss how partnership deeds differ for service-based and product-based businesses.

1. Nature of Business and Scope of Work

  • Service-Based Business: The deed should clearly define the nature of services offered, client engagement policies, and intellectual property rights.
  • Product-Based Business: The deed must include product sourcing, manufacturing, quality control, inventory management, and sales terms.

Example Clause for Service-Based Business:

"The firm shall provide IT consulting services, including software development, system integration, and cybersecurity solutions. No partner shall engage in any competing service without prior consent."

Example Clause for Product-Based Business:

"The firm shall manufacture and sell textile products across India. The firm shall procure raw materials from approved vendors, and partners shall oversee quality control and distribution."

2. Capital Contribution and Profit Sharing

  • Service-Based Business: Capital investment may be lower, and profit-sharing is often based on expertise and client contributions rather than financial input.
  • Product-Based Business: Requires higher investment in inventory, machinery, and logistics. Profit-sharing is usually linked to financial contribution.

Example Clause for Service-Based Business:

"Profits shall be shared in a 40:30:30 ratio among partners based on their client acquisition and project completion efforts."

Example Clause for Product-Based Business:

"Profits shall be shared in proportion to the capital investment made by each partner, as per the following ratios: Partner A – 50%, Partner B – 30%, Partner C – 20%."

3. Liability and Risk Management

  • Service-Based Business: Risks are mainly related to client disputes, intellectual property rights, and non-performance. The deed should include clauses on liability limitation.
  • Product-Based Business: Risks involve product defects, inventory losses, supply chain failures, and legal compliance. The deed should cover indemnity clauses.

Example Clause for Service-Based Business:

"In case of a client dispute, the partner responsible for the project shall bear the legal costs unless proven otherwise."

Example Clause for Product-Based Business:

"Any losses due to defective products shall be shared proportionally by partners, unless the fault lies with a specific partner’s negligence."

4. Decision-Making and Authority

  • Service-Based Business: Decision-making may be more decentralized, with partners independently managing their clients.
  • Product-Based Business: Requires structured decision-making regarding procurement, manufacturing, pricing, and distribution.

Example Clause for Service-Based Business:

"Each partner shall have the autonomy to take client-related decisions up to ₹5,00,000. For projects exceeding this value, unanimous consent is required."

Example Clause for Product-Based Business:

"Any decision related to manufacturing, procurement, or sales above ₹10,00,000 shall require the approval of at least 75% of partners."

5. Exit and Dissolution Policy

  • Service-Based Business: Partner exit policies should cover knowledge transfer, client transition, and non-compete agreements.
  • Product-Based Business: The deed should define asset valuation, inventory distribution, and financial settlements upon dissolution.

Example Clause for Service-Based Business:

"A departing partner shall not engage in a competing business for two years within Rajasthan and shall transfer ongoing client contracts to the remaining partners."

Example Clause for Product-Based Business:

"Upon dissolution, all assets, including unsold inventory and machinery, shall be liquidated and profits distributed based on capital investment ratios."

Final Thoughts

Drafting a partnership deed tailored to your business type ensures smooth operations and minimizes legal risks. Entrepreneurs in Rajasthan and across India should consult a legal expert before finalizing their partnership agreements.

If you need help drafting a customized partnership deed for your service-based or product-based business, feel free to reach out!

Stay tuned for more insights on partnership firm registration and legal drafting! 🚀

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