Modes of Reconstitution of a Partnership Firm
A partnership firm is one of the oldest existing forms of business ventures. There are several notable examples of successful partnership firms around the world. Noteworthy among them are eBay, Twitter and Apple, which are household names. Partners in business are often individuals who share common interests and hobbies, and who bring specific skill-sets to their ventures. Since their bonding extends beyond just making profits, the results they achieve are often extraordinary.
When is a Partnership Firm Reconstituted?
There are 4 specific instances which may necessitate this restructuring:
When there is any alteration in the profit-sharing ratio between partners.
When there is imminent admission of a new partner into a firm.
When a partner resigns or retires, and
On occasions when a partner dies or is rendered insolvent.
We will look at each instance closely. Before that, here’s a task for you. Log on to the Internet and find out the story behind Apple and its co-founders: the ‘Two Steves.’ They were Steve Jobs and Steve Wozniak. Jobs was a terrific sales-person and an excellent brand ambassador. Wozniak was the ‘geek’ and the trouble-shooter.
Forms of Reconstitution of a Partnership Firm
The four types are explained.
Changes in Profit-Sharing Ratios Between Partners
One of the guiding principles of partnership firms is profit-sharing. If two persons form a partnership firm, they are entitled to split the gains made. They must also manage the losses incurred, if any. If there are pressing issues regarding profit-sharing between partners, a reconstitution of partnership firm is needed.
The old ratio in which all profits made were divided will stand null and void. A new legally valid partnership deed will be drawn up. All the new details of profit sharing will be mentioned therein. Only these new terms will be applicable in future. There can be several reasons why profit-sharing ratios may need a relook. One partner may not be happy with the status quo. Someone else may not be pleased with how his or her partners are being compensated. At times, a partner may decide to take on reduced responsibilities. In that case, his share of a firm’s profits is likely to take a hit.
Admission of a New Partner
Whenever a new partner joins a firm, the legalities must be reconstituted. Admittance of a new partner should be unanimous. However, the Partnership Act of 1932, which governs the reconstitution of partnership firms in India, has certain provisions which will take effect if there is no unanimity between extant partners.
The new partner may bring in fresh ideas, new sources of capital, a renewed drive to the business or enhanced managerial ability. Note that it is not mandated under the law that every time a new partner joins a firm, an older one has to leave. This new partner will take a part in the profits generated. He will also have a say in day-to-day activities of the partnership firm. All assets and liabilities, and even intangible articles like goodwill, will be re-tailored to suit the new partner/s.
DIY tasks for advanced students: Find out details on India’s Partnership Act of 1932. It is obviously an old set of laws. Why has it not seen amendments? Or are there amendments waiting in the wings? You will also find later additions including the Limited Liability Partnership Act of 2008, which laid out the foundations for LLPs and LLCs in India.
Retirement of a Partner
Often, a partner may choose to retire on account of age or ill-health. Retirement is voluntary and no law dictates when a partner in a firm can, or cannot, retire or exit a partnership. Reconstitution of partnership firms is needed in such instances as profit-sharing, capital inputs and shouldering of liabilities are bound to change. Upon retirement, that partner will be paid his share of profits valued till the period he or she has served.
Note that there is a provision for prolonged payments to a retired partner if he continues to shoulder certain responsibilities even after a new deed is constituted and agreed upon. Before you move on to the last part, you must know that reconstitution of partnership deed is a serious legal process. A majority of active partners need to witness it, and it must be admissible in a court of law. An example of a fresh partnership deed post reconstitution follows.
Death/Insolvency of a Partner
Reconstitution of partnership firms is necessitated when a partner passes away or becomes insolvent. In case of insolvency, the laws state that he or she cannot continue being a partner in a firm. All dues are to be repaid to the bankrupt partner. The partnership agreement which existed before ceases to exist.
In case of death, all outstanding dues will be paid to any legal heir of that partner. Note that the heir has to stake a claim. Find out more on partnership laws, firms and related topics in Vedantu’s study materials. You can also install the app for easy access to the same.
The Need of Reconstitution in a Partnership Firm
For starting any Business the investor can unite with another individual and invest their money in equal shares for greater returns. This type of venture is known as a Partnership and can be traced back even in the 14th century. This is quite popular today also. We can see many big corporations and conglomerates like Apple, Uber, The Red Bull company that started as partnerships and are very successful these years. To understand how these great companies became so successful we need to understand their origin and the different types of legal procedures they are bound to follow.
When two or more persons come together they have to make an agreement or contract before starting functioning as a business entity. This agreement contains all the general laws and regulations of the establishment of a company along with the specific rules defined by the partners to run and manage the business. It explains all the commonalities and procedures that need to be followed during the financial investment during the operation and also the sharing of the profit generated therein.
The main concern in this topic is how any partnership company deals with any changes that may occur due to change in the arrangement they follow. It can happen for many reasons such as if there is a change in the ratio according to which each partner draws its profit. Or if they want to include another person as the partner or exclude any partner due to retirement or any other reasons.
FAQs on Reconstitution of a Partnership Firm
1. What is Modes of Reconstitution of a Partnership Firm?
In any business entity, if there is a change in profit-sharing between partners, if a new member is joining, or if one of the partners retires or passes away, the modes of reconstitution, or rebuilding that firm from scratch, starts.
1. Modes of Reconstitution of a Partnership Firm - Admission of a Partner
A new partnership deed has to be drafted and agreed upon when admitting a partner. All procedures must follow India’s Partnership Act of 1932.
2. Modes of Reconstitution of a Partnership Firm - A Death of a Partner
If a partner in any firm dies, his or her legal heir is entitled to all outstanding dues that the deceased person was to receive till his term of service.
2. I am currently studying in Class 12 Commerce Stream. Why should I follow the Vedantu Website?
For class 12 commerce, students are required to build their foundation as strong as they can or else it can get very difficult for them in the subsequent higher studies. If you solve all the chapters of your regular coursebook it can be very beneficial but never sufficient. So they must always yearn to find more articles on the subject and reinforce their learning process as possible. By reading extra information about any topic can enhance your answers with more valid points and fetch you good marks.
3. What are the various types of Partnership that can operate as a Business Entity?
In the Business world, any person who wants to start a firm together with another individual with the same plans and rights can choose from any of four types of partnership namely General partnership, Limited partnership, Limited liability partnership, and Limited liability limited partnership. To register themselves as any type of partnership the investors have to read and understand all the aspects of each type. Every partnership has its own advantages and disadvantages that need to be taken care of while running the business.
4. What is the Difference between a Limited Liability Partnership and General Partnership?
Any partnership has the same motive of origin but differs in the arrangements for achieving the goal. In a general Partnership, the investors of capital are fully responsible for all the financial activities together like an individual. They share all the profits and losses equally without providing the total turnover of the company. But in a Limited Liability, the partners are not the direct controller or managers of the company. Instead, they are the shareholders in a company which itself is a legal entity and managing its own expenses like any individual.
5. Who are Equity Partners?
Every business starts with the motive of earning revenue as profit or income. For this, it requires an investment of money over an idea of generating value in terms of goods and services which is sold in the society. The people employed as workers in the business work for this goal and are paid wages or salaries as decided by the management. They are not responsible for any loss or profit of the business. On the contrary, individuals or partners who have invested their money by buying or holding shares also participate in the distribution of profit which is called equity. so such shareholders are also known as equity partners.
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