File Tax Returns
A partnership is a form of business organisation wherein two or more persons come together to carry on a certain business. Partnerships are one of the most popular types of business organisations. However, a partner who was present at the time of the formation of the partnership is not one who would necessarily stay throughout the entire lifetime of that business.
It is quite common for partners to exit or withdraw from partnerships due to various reasons, voluntarily or otherwise. This is the reason that the provision for both admission and removal of partners is made when the partnership agreement is initially drawn up. The guidelines regarding the same ensure that there is nothing that could potentially give rise to conflict.
Partnerships in India are governed by the Indian Partnership Act, 1932 (“Act”). The rules regarding partnership, including the rights and duties of a partner, the contractual relations between the partners and third parties and all other rules necessary for carrying on the partnership are provided for under the Act.
The partnership deed is the most important document for a partnership. It is an agreement between the members of the partnership, called “partners”, to carry on the partnership business and share the profits and losses based on the ratio agreed upon in the partnership deed. It also lays out the provisions regarding the rights, duties, and obligations of the partners, the procedure for the admission or removal of a partner, and the procedure with respect to the dissolution of the partnership.
Partnerships are most sought after since they are easy to set up. The costs involved in setting up a partnership firm are relatively inexpensive. In terms of compliance as well, there is very little to do in partnership firms as compared to that of LLPs, which have a corporate structure, and hence are subject to higher compliance costs. Moreover, the registration of a partnership firm under the Act is voluntary and not mandatory, as in the case of LLPs.
Voluntary withdrawal refers to a situation where a partner decides to exit or step out of the partnership of his own free will or his own accord. The reason behind the same may be personal, such as his desire to go into retirement or if he simply does not wish to be part of the firm anymore.
Contrary to voluntary withdrawal, this refers to situations where a partner is forced out of the partnership firm. The act of withdrawal, in this case, is not carried out with the consent of the partner. Non-voluntary withdrawal may arise in situations, where-
The partnership agreement is the cornerstone for a partnership firm. It governs every single action carried out by the firm, and hence, a thorough and detailed study of the same has to be conducted by the exiting partner.
There is a specific part in the partnership deed that acts as a guide with regard to the withdrawal of a partner and his subsequent removal. These provisions have to be studied thoroughly so that they are adhered to in every sense, and the entire procedure is carried out smoothly.
The procedure regarding the withdrawal of capital, the transfer of interest, the equitable distribution of the assets, the payment of any liabilities specific to the exiting partner must all be carried out as per the provisions of the partnership agreement so as to ensure that there is no scope for conflict, whatsoever.
Where the business is being carried on post the exit of the partner, the exiting partner may also choose to sell his share to the other partners. If the provisions with regard to the withdrawal of partnership are not provided in the partnership deed, then it will be carried out as per the provisions of the Act.
The main purpose of drafting a notice signifying the withdrawal is to notify or intimate the other partners of the desire to exit the partnership. The notice will also specify the date from which the withdrawal from the partnership will be effective. Since the partners carry on the business on a daily basis, it is imperative that they are notified of the exiting partner’s intention to withdraw from the partnership lest it affects their business in a negative manner.
The notice of withdrawal shall be fairly simple, containing details, such as-
Events, such as the removal of a partner, are the potential for conflicts to arise. However, with instruments, such as the partnership deed and the provisions of the Act, which lay out the procedure for any and every such event, the likeliness of these situations to turn ugly is bleak.
Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.