Reconstitution of a Partnership firm means change in the existing agreement leading to the formation of a new agreement with certain variations.
Reconstitution implies rearrangement of the partnership firm. This affects the exiting relationship among the members/partners and gives rise to a changed structure of the firm.
Modes of Reconstitution of a Partnership Firm –
There are various ways through which reconstitution of a partnership firm can be affected.
They are –
- Admission of a new partner – The partnership firm might admit a new partner to the partnership firm when it requires additional capital contribution or when it needs managerial support. The decision to admit a new partner demands an unanimous agreement of all the existing partners, unless stated otherwise in the partnership deed.
For eg – A and B are partners in a firm and their profit sharing ratio is 1:1. They admit C as a new partner thereby leading to reconstitution of the partnership firm.
- Change in the profit sharing ratio among the existing partners – At times the partners decide to change the ratios in which they originally share the profits. This may happen due to change in the level of responsibilities between the partners or change in the amount of capital contribution. Such change in profit sharing ratios between the existing partners is another mode of reconstitution of a partnership firm.
For eg – A and B are partners in a firm and their profit sharing ratio is 2:1. The scope of work of B is brought at par with that of A. The partners agree to an equal share in profits of the firm. This leads to formation of a new partnership agreement between them. This change is also classified as reconstitution of the partnership firm.
- Retirement of an existing partner – This is another mode of reconstitution of the partnership firm. A partner may decide to retire from the partnership firm any time he wishes. Such retirement can be due to health conditions, old age, or any other reason. This will result in a change in the structure of the partnership firm.
For eg – A, B and C are partners in a firm sharing profits in the ration of 2:2:1. Partner C decides to retire from the firm due to change in business interests leaving only A and B as the partners. This change in the organisation structure is termed as reconstitution of the partnership firm.
- Death of a partner – When a partner of a firm dies, the terms of the existing partnership agreement stands uncompiled. This situation requires drafting a new agreement between the remaining partners if they decide to carry on the business. Therefore, death of a partner also leads to reconstitution of the partnership firm.
For eg – A, B and C are partners in a firm sharing profits in the ration of 2:2:1. Partner C died on March 31, 2010. A and B decide to share the profits in the ratio 1:1 from April 01, 2010 onwards. This is also termed as reconstitution of the partnership firm.