Explain what is the Concept of Reconstitution of a Partnership Firm in Simple Terms
Explain what is the Concept of Reconstitution of a Partnership Firm in Simple Terms

Explain what is the Concept of Reconstitution of a Partnership Firm in Simple Terms

Reconstitution of a partnership firm

Sometimes, the partnership firm needs to be restructured due to the reason behind the admission of a new partner, death of a partner, retirement of a partner, or partner’s wish to change terms between them, Etc. Thus, if the partnership goes to restructure, it is known as the reconstitution of the partnership firm. In this article, we address and explain the subject of the reconstitution of a partnership firm. So please stay tuned and read below;

What is a partnership firm?

In simple words, we can say that a partnership is an agreement created between two or more persons to distribute the profits of a business between them. Here, one notable thing is that the Firm business is run by all partners or any of them on behalf of all.

What is the Reconstitution of Partnership Firm?

Reconstitution of a partnership firm means any changes made in the existing partnership agreement made by in previous between the partners of the firm known as reconstitution of a partnership firm. Here, one thing we should note is that after the completion of changes in an existing partnership agreement ends. A new between partners will apply as a partnership firm deed.

That can be any time the partnership firm reconstitutes due to changes in terms of profit sharing parts between the firm while entering a new partner, retirement and death of a partner, or if a partner becomes bankrupt. Now, after understanding a partnership firm. Let’s look at the forms of reconstitution of a partnership firm that are given below;

Forms of Reconstitution of a partnership enterprise

Sometimes, we observe that the partnership firm goes for reconstitution. The reconstitution can take place due to many reasons, some different modes of that are given below;

(1) Change the profit-sharing ratio between the current partners

Sometimes, the existing partners of the partnership firm decide to change their profits sharing ratios among them. Due to any reasons such as changing their role as a partner in the firm, changing their investment ratio, changing their activities toward the firm, etc. In this situation, there needs to be a reconstitution of the partnership firm.

Let us look at it with an example: suppose X, Y, and Z are partners in a partnership firm. They run the firm business with an equal sharing profits ratio. Partner X lives in another city and can’t manage any active role in the firm business. So, that is a reason to decide on a new profit-sharing ratio among the existing partners.

(2) When a new partner gets admission to the firm

Sometimes, the partnership enterprise requires more funds or management-related help, and therefore, the firm needs to admit a new partner to meet the particular requirement. According to the Partnership Act of 1932, a new partner can be admitted only with the consent of others.

Thus, if a new partner comes into the partnership firm, a new partnership agreement needs to be formed accordingly partnership agreement is reconstituted. As an admission of a new partner, the profit-sharing ratio is also changed based on the assets, liabilities, role of partners, and goodwill.

Also Read: What is a Nominal Partner in Partnership?

(3) The Retirement of the existing partner of the firm

The Firm partners can decide on the retirement term and can retire or withdraw from the partnership firm. Many reasons can be established for retirement, such as age, health issues, if the firm nature will be changed, etc. But one notable thing is if the partnership nature is a partnership at Will. Then, the partner can retire at any time.

Thus, such retirement is a cause for the reconstitution of a partnership enterprise because, after the retirement of an existing partner, the funding and profit-sharing ratio will be affected, and that can be changed. That is the reason the firm will revalue the profit loss and goodwill.

Let’s understand it with an example suppose: A, B, and C are partners in a partnership enterprise, and their profit ratio is 3:2:1. Now, A goes for retirement from the firm, and B and C choose to divide the profit ratio of the firm equally. It is called the reconstitution of a partnership firm.

Also Read: What is an active partner in a partnership firm, and how it works?

(4) Death of a partner of the firm

If the partnership firm partner dies and the remaining partners want to continue the firm’s business, that also results in the reconstitution of the firm. In that case, the remaining dues are paid to the legal heirs of the deceased partner of the partnership firm.

(5) Insolvency of a partner of the firm

If, for any reason, any of the partners is declared insolvent and other partners decide to continue the firm’s business, it is also a reason for the reconstitution of a firm. The dues of an insolvent partner are paid, and the partnership agreement is terminated. According to the legal provisions, an insolvent partner can not enter any contract or agreement. Thus, the partnership firm is required to reconstitute among the other existing partners.

Also Reade:

Is registration of a Partnership Firm Compulsory in India?

Which Provisions Are Available For The Partners In The Absence Of The Partnership Deed?

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Know about the Modes of Reconstitution Of a Partnership Firm

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