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

(1) Introduction:

For a secured living, sometimes people come to form a partnership firm. The main reason behind that is they like to go with their own rules and even they seek to be completely independent. But whatever they do to run the firm, they have to maintain the rules regarding reconstitution of 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 very 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 reconstitution of the firm, the rest 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. Which are in the details given below.

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

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

From time to time, the firm needs reconstitution of partnership, as per 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. So do not stay away, be with a positive mind and grab these 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, just 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, 1932, a new partner can come into the firm if other partners agree. During the admission of a new partner, a new agreement will come to be formed and the firm automatically becomes reconstituted. Now the new partner gets the right to share the assets as well as 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 his or her existence from the firm because of his old age, bad health, or the firm’s nature. In that case, he or she can do that according to his or her 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 very well with its remaining partners.  

(3) Death  of Partner:

When an existing partner of a firm dies, the agreement of partnership stands uncompelled. In that case, the firm needs a new agreement among the remaining partners if they want to carry on the firm. That means the death of a partner leads to the reconstitution of the firm. For example, the reconstitution comes to be cleared. 

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

(4) Insolvency of Partner:

According to section 34 or 34(1), any partner of the partnership firm may come to be adjudicated as insolvent by the court authority, 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 firm from the date of insolvency. Even the firm does not remain the same for any act of insolvent partner.

In that case, the firm is also not liable for any actions taken by the insolvent partner after he or she has been declared insolvent.

(5) Change of profit ratio among the partners:

Sometimes the existing partners come to a point for changing their profit ratio depending on the 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.  Partner C does not take part in the firm due to shifting to another city. Now the new share comes with the 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 that, the partners of the firm 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 any kind of legal help. 

For the solution of that kind of issue reconstitution of partnership necessarily prove the beneficiary of the partners of the firm. 

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

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

Having a partnership firm if you face any of the above-mentioned issues, then you should bring your firm under reconstitution of partnership.

(3) What is Meant by 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 agreement 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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