What is Reconstitution of a Partnership Firm?
It is often noticed that a partnership firm undergoes restructuring. These changes are brought about by certain conditions like the retirement of a partner, admission of a new partner or change in terms of business among the existing partners like change in profit sharing etc.
This restructuring in firms is known by the term reconstitution of a partnership firm.
Reconstitution of a partnership enterprise normally takes place in any of the following ways mentioned below :
- Admission of a new partner: A new partner might be admitted when an enterprise requires additional capital or organisational assistance. In accordance with the provisions of the Partnership Act 1932 and it is diversely furnished in the deed of partnership, a new partner can be admitted when the existing partners collectively give their consent for it. For instance, A and B are partners sharing gains in the ratio of 3:2. During the year 2017, on the 1st of April they admitted C as their new partner with 1/6 share in profits of the enterprise. With this change, now there are 3 partners in the enterprise and it stands reconstituted.
- Change in the profit sharing ratio: Sometimes the partners of an enterprise may determine to change their current gain (profit) sharing ratio. For instance, Roy, Ram and Raj are partners in an enterprise, who are sharing profits in the ratio of 3:2:1. With effect from 1st of April, 2017 they determined to share profits equitably as Raj brings in additional capital. This results in a difference in the existing agreement that leads to reconstitution of the enterprise.
- Retirement of an existing partner: This means withdrawal by a partner from the business of the firm which might be due to his deteriorating health conditions, old age or change in business activities. In fact, a partner can retire any time, if the partnership is made at will. For instance, A, B and C are partners in the enterprise sharing gains in the ratio of 2:2:1. On the account of illness or retired from the enterprise on the 31st of March, 2017. However, this results in reconstitution of the firm now possessing only 2 partners.
- Death of a partner: Partnership may determine reconstituted on the death of a partner, only if the remaining partners determine to persist the business of the enterprise as usual. For instance, P, Q and R are partners in an enterprise sharing profits in the ratio 3:2:1. P died on the 31st of March, 2017. Q and R determined to borne the business sharing future profits equitably. The continuity of business by Q and R sharing future profits equitably leads to reconstitution of the enterprise.
The above mentioned is the concept that is explained in detail about Modes of Reconstitution of a Partnership Firm for the Class 12 students. To know more, stay tuned to BYJU’S.