Why does a firm seek reconstitution of partnership? (know the Modes, Types with FAQ)

What is the reconstitution of a partnership firm? (know the Modes, Types with FAQ)

(1) Introduction:

For a secure living, sometimes people come to form a partnership firm. The main reason behind this is they like their own rules and even seek to be completely independent. But whatever they do to run the firm, they maintain the reconstitution of the partnership.

If you are a member of a partnership firm, you have to maintain the reconstitution process for partnership. As a new one for a partnership firm, you may be unaware of the rules and when the rules are essential.

Generally, when a new one comes to join your firm or an existing partner leaves the firm, the process of partnership reconstitution is required.  After the reconstitution of the firm, the partners will have legal rights in every activity of the firm.

So, as a dutiful partner of your firm, you need to know the details about the process. That is in the details given below.

(2) What is a reconstitution of a partnership firm?

In a commercial sense, a partnership means the best mutual understanding between two or more persons to carry on the business and share the profits. When a firm comes to be formed under mutual understanding, the firm is called a partnership firm. Every country has its partnership Act. In India, the rules of working and a partnership firm are governed by the Indian Partnership Act 1932.

From time to time, the firm needs reconstitution of partnership, as the firm needs to be changed in its structure. Even the firm requires adding new partners or providing retirement of any existing partner. Moreover, the reconstruction becomes very essential during the profit-sharing among the partners.

Today, this article will focus on different modes of reconstitution of partnership. So do not stay away and read with a positive mind for your future needs.

(3) Modes of Reconstitution of Partnership Firm:

Depending on hassle-free working in the partnership firm, there are many modes for reconstitution in a partnership firm. To have the right concept about the reconstitution, take a look below.

(1) Admission of a new partner:

Sometimes, a firm needs additional capital or a kind of help called managerial help. In that condition, the firm will have the power to admit a new partner. According to the Partnership Act of 1932, a new partner can be added to the firm if other partners agree. During the admission of a new partner, a new agreement will need to be formed, and the firm automatically becomes reconstituted. Now, a new partner shares the assets and the profit according to the capital ratio. At the joining of a new partner, some changes come in the ratio of sharing of profit, assets & liabilities.

(2) The Retirement of an existing Partner:

An existing partner may decide to retire or withdraw from the firm because of his old age, bad health, or the firm’s nature. In that case, they can do that according to will. Then the firm needs reconstitution of partnership and the number of partners, the ratio of capital contribution and profit sharing ratio come to be changed. The retiring partner will get paid a share of capital, profit or loss, and goodwill.

Having a new constitution, the partnership runs well with its remaining partners.  

(3) Death  of Partner:

When an existing partner of a firm dies in that case, the partnership agreement stands uncompelled. In that case, they need to create a new partnership agreement among the remaining partners, if they want to carry on the firm.

Suppose a partnership firm is formed with three members, A, B, and C, sharing 2:2:1. Partner C dies, on March 31, 2010. The existing partners A and B, make a new profit or loss ratio of 1:1. The new ratio between them is termed as a reconstitution of the partnership firm.

(4) Insolvency of Partner:

According to section 34 or 34(1), any partner of the partnership firm may be adjudicated as insolvent by the court or the competent authority. In that case, the remaining partners in the firm should come for adjudication under section 34(2).

The new constitution clarifies that the estate of the insolvent partner will not be liable in need of a firm. Even the firm does not remain responsible the same for any act of an insolvent partner. In that case, the firm is also not liable for any actions taken by the insolvent partner after being declared insolvent.

(5) Change of profit ratio among the partners:

Sometimes, the existing partners change their profit ratio depending on their roles in the firm and their capital investment. The changing of the old profit ratio will make a reconstitution of the firm.

For example, A, B, and C were the partners in a firm having equal profit sharing. A partner C is not taking part in the firm due to shifting to another city. Now, the new share comes with a ratio of 2:2:1. That means this new ratio makes a new reconstitution of a firm.

(4) Reconstitution of partnership firm questions and answers:

(1) What is the benefit of reconstitution of partnership?

When a firm goes for reconstitution because of the death of a partner, joining of a partner, or retirement of a partner, the firm runs lawfully for a long. As a result, the partners do not get in touch with any hassle regarding profit sharing or other needs. Even the partners can show themselves as legal members of the firm if they want legal help.

For the solution of that kind of issue reconstitution of partnership necessarily proves the beneficiary for the partners.

(2) Will any problem come if a partnership firm runs without reconstitution? 

The partners will face different problems if reconstitution is not maintained for a firm after the partners’ death or retirement. Even they will suffer from profit sharing.

Having a partnership firm, if you face any of the problems mentioned above. Then, you should bring your firm under reconstitution of partnership.

(3) What is Meant by the Reconstitution of a Partnership Firm?

The word “reconstitution of a partnership” refers to when an established partnership agreement is changed, resulting in the termination of the existing one and the creation of a new partnership agreement.

Also Read:

Is registration of a Partnership Firm Compulsory in India?

What is a partnership deed? (know the meaning, content, future, and Importance of partnership deed)

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