Modes of Reconstitution of A Partnership Firm

Introduction: What is Reconstitution of a Partnership Firm?

Partnership firms are one of the most popular and oldest forms of business. In these firms, individuals may have different ownership or profit (and loss) sharing ratios. A partnership firm runs according to a formal document known as a partnership deed. The partnership deed records all necessary legal policies for running the firm.

However, in certain instances, the partnership ratios may need to be restructured. This restructuring leads to a change in the partnership deed. Although partnership restructures often refer to changes in profit-sharing ratios, there may also be other formal decisions that lead to the restructuring or reconstitution of a partnership firm.

Some popular partnership firms in the world include Google, Apple, and eBay. The success of partnership firms is probably derived from the dedication and bonding of partners which goes beyond just profit-sharing.

Reasons or Modes for Reconstitution of a Partnership Firm

A partnership firm may be reconstituted for four specific reasons or modes. They are as follow −

When there is a change in the profit-sharing ratio

Profit-sharing is one of the most important features of a partnership firm. It is usually mentioned in the partnership deed. However, in certain instances, the profit- sharing ratio may need an update. Usually, when there are only two partners in a partnership firm, the profit is split equally between them. However, in the case of an urgent need, the prodigy sharing ratio may require a change.

For this, a new partnership deed is made which indicates the new profit-sharing ratio and all other required guidelines of the partnership firm. The old partnership deed becomes null and void. The new guidelines will be applicable in the future in the operation of the partnership firm.

There may be several reasons why profit-sharing ratios may need a change. A partner may not be happy with the profit-sharing patterns, there may be issues with one partner’s status quo, etc. In some cases, a partner may need to reduce his or her responsibilities which may reduce his or her profit-sharing ratio as well.

Admission of a new partner

The partnership deed and therefore the partnership terms need to be reconstituted when a new partner joins a partnership firm. In India, the partnership act of 1932 is applicable to issues related to new admissions of a partner. For example, usually, the admission of a new partner in a partnership firm should be unanimous. However, when it is not so, the partnership act may be used to determine the rules and regulations of the firm.

The admission of a new partner usually brings new resources, ideas, and enhanced drive to the business. However, notably, there is no need for one partner to leave when a new partner joins the firm. The new partner must have a profit ratio and he can have a say in the general activities of the business. All assets and liabilities of the firm, including intangible assets like goodwill, must be re-stated to suit the new partnership form of the business.

Retirement or resignation of a partner

Partners of a partnership firm may choose to resign or retire as they wish and no one can dictate when and why one shall leave the firm. The common reasons for people to retire are old age and illnesses. However, there may also be other reasons for retirement that may be largely voluntary.

Due to the retirement or resignation of a member, the profit-sharing ratio, capital inputs and sharing of responsibilities may change which may need a new partnership deed to be formed. When a partner retired he is paid the share of profits up to the period till which he has served the firm.

It is noteworthy that the due payment to a retired partner may be prolonged in the case he or she continues to remain responsible for some operational activities of the firm. This would occur even after a new partnership deed is prepared. The reconstitution of a partnership firm is a legal process that is admissible to a court of law. Hence, the active partners of the firm also need to witness this.

Death or Insolvency of a Partner

It is quite possible that a partner may die or become bankrupt during his stint as a partner of a partnership firm. If a partner dies while he is a partner of a firm, all his dues must be paid to his legal heir upon demand from the latter’s end.

When a partner becomes insolvent, he cannot continue as a partner in a partnership firm. All his dues must be paid to the bankrupt partner. The partnership deed that defines the roles, rules, and responsibilities also becomes null and void for the bankrupt partner.

Reconstitution of A Partnership Firm in A Nutshell

The partnership firm requires more than one initial investor in a business idea and the partners usually bear the risks and responsibilities of a business. There have been many stories of the success of partnership firms in the world of business. One of the major reasons for the success of partnership firms is that when two or more people unite to form a business, they bring fresh ideas and skills to the table. This may act as an impetus for success.

Moreover, as losses are shared by the partners according to the deed, there is an increased support for the partners to bear the brunt while doing the business. Many successful companies have gone through complex times in business but later became very successful as partnership firms. Staying together is also a valued outcome of partnership firms.

However, partners may need to go apart for many reasons. That is why restructuring or reconstitution of partnership firms is required. Usually, the norms of separation are included in partnership deeds when they are formed. But if the norms are missing, the laws pertaining to such changes may be helpful for the concerned individuals or partners.

Conclusion

It is important to keep an eye on modes of reconstitution of partnership firms because they show the various norms and necessities required to obey during the process of restructuring partnership businesses. Partnership firms are one of the most popular forms of business; so, it becomes even more important to study the changes that occur while the reconstitution of these firms.

FAQs

Qns 1. Depending on which legal document does a partnership firm run?

Ans. A partnership firm runs according to a formal document known as a partnership deed. The partnership deed records all necessary legal policies for running the firm.

Qns 2. Which law is related to the partnership firms’ operations in India?

Ans. The operations of partnership firms should be followed according to the Partnership Act of 1932.

Qns 3. Can a bankrupt partner continue as a partner of a partnership firm?

Ans. No, a bankrupt partner cannot remain a partner of a partnership firm. He must retire from the partnership when he goes bankrupt.