- List of Commerce Articles
- Admission Of A New Partner
Admission of a New Partner
What is the admission of a partner.
A business firm seeks new partners with business expansion being one of the driving motives. As per the Partnership Act, 1932 , a new partner can be admitted into the firm with the consent of all the existing partners, unless otherwise agreed upon.
With the admission of a new partner, there is a reconstitution of the partnership firm and all the partners get into a new agreement for carrying out the business of the firm.
The following conditions led to the addition of a new partner:
- When the firm is in an expansion mode and requires fresh capital.
- When the new partners possesses expertise which can be beneficial for the business expansion of the firm.
- When the partner in question is a person of reputation and adds goodwill to the firm.
Also Read: Basic Concepts of Accounting for Partnership
The following adjustments need to be made at the time of admission of a new partner
- Calculating the new profit sharing ratio along with the sacrificing ratio.
- Accounting for goodwill.
- Revaluation of assets and liabilities.
- Adjustment of capital as per new profit sharing ratio.
With the admission of a new associate, the partnership enterprise is restructured and a new agreement is entered into; to carry on the trading concern of the enterprise. A newly added partner obtains 2 primary rights in the enterprise :
- Right to share the assets of the partnership firm
- Right to share the profits of the partnership firm
Must Read: What is Goodwill?
Treatment of Goodwill in the Admission of a Partner
A new partner is entitled to be a part of the future profits of the firm upon being added to the firm. The act of admitting new partner also leads to the reduction in the future profit sharing ratio of the existing partners. For this reason a new partner has to bring extra value apart from capital, this is known as Premium for Goodwill.
Treatment of goodwill on admission of a new partner will be based on the following conditions:
- When the amount for goodwill is paid privately
- When the amount necessary for paying the share of goodwill is brought as cash.
- When share of goodwill is not brought as cash.
Adjustment of Capital and Change in Profit Sharing Ratio Among Existing Partners
Few significant points which require observation during the admission of a new partner are mentioned below :
- Sacrificing ratio
- New profit sharing ratio
- Revaluation of assets and Reassessment of liabilities
- Valuation and adjustment of goodwill
- Adjustment of partners’ capitals
- Distribution of accumulated profits (reserves)
The above mentioned is the concept that is explained in detail about the Admission of a New Partner for the Class 12 students. To know more, stay tuned to BYJU’S.
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Partnership Law for Business Partners Essay
Introduction, carmichael vs. evans, 1904, liability of the firm for torts, yenidjm tobacco co. ltd. 1904.
Before advising my clients on which course of action and their rights as regards to the partnership. I will need to establish whether there was a partnership and the provisions of the partnership. I will begin with definition of a partnership as relationship, which subsists between persons carrying on a business with an aim of profits. However, not relationship between persons with an aim of profits is partnership. Some relationships are formed for purposes of carrying on business with a view of profits a company or any association registered under the companies act or other laws.
A partnership is a relationship that exists between two or more persons jointly carrying out a business with the objective of making a profit. Each of the persons is called a partner and the business is referred to as a firm. A partnership is a relationship and does not, therefore, mean the firm. In a partnership a number of people work together and there is no separate identity of the partnership from the individual partners.
In order to find out whether there is existence of a partnership some rules have been laid down. These rules include:
- joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.
- the sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.
- the receipt by a person of a debt or other liquidated amount by installments or otherwise not of the accruing profits of a business does not of itself make him a partner in the business or liable as such.
- a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such.
- a person being the widow or child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such.
- the advance of money by way of loan to a person engaged or about to engage in any business on a contract in writing with that person, signed by or on behalf of all the parties thereto, that the lender shall receive a rate of interest varying with the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such.
- a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.
On the case at hand, we are told the partnership has been in existence for the last 10 years and we are given a section of provision number 18 of the partnership deed. The section given states that “If any partner shall: – by act or default commit any flagrant breach of his duties as a partner; or act in any respect contrary to the good faith which ought to be observed between partners;… then and in any such case the other partners may by notice in writing given to him or left at the office of the partnership, expel him from the partnership…”
From the section, provided I conclude that there is a partnership among the original partners. My advice to the partners will be based on the provisions in the partnership law since only a section of the partnership deed is provided.
If they fail to agree, the partnership will have dissolved. In YENIDJM TOBACCO. CO. LTD 1904, the partnership was making profit but the relationship between the partners was so bitter that they refused to speak to each other. it was held that the partnership should be dissolved. In another case Bolton Partners v Lamberts, 1889.L made an offer to M, manager of Bolton Partners.
So Thomas Charles and Stella had formed a partnership and apart from the partnership agreement they had decided that Thomas could incur debts exceeding £300 on behalf of the firm. The remainder was in accordance to the partnership Act which means that: –
- Capital must be contributed equally, and profit should also be shared equally.
- No interest should be credited on capital.
- No interest should be charged on drawings.
- Each partner should take an active part in the management of the partnership and no salaries should be payable to them.
- All decisions should be made on the basis of majority opinions.
- Major changes like change of purpose and introduction of new partners should be on the agreement of all partners.
- Books of accounts must be kept at the principal place of business.
- Loan advances by partners will be made at an interest rate stipulated in the Partnership Act.
- How partners should be reimbursed if they incur liabilities on behalf of the partnership.
- All the partners have the right to inspect all books of accounts.
- The partners cannot carry out any competing business.
- loan repayment,
- capital repayment,
- surplus repaid on equal profit sharing basis.
Thomas was on official duty on behalf of the company because he was answering an important call from a client hence the company should be liable for the loss assuming that Thomas was acting as an employee and not as a partner. Partnership Act stipulates that profits and losses should be shared equally among partners.
On the part of negligence, Thomas wasn’t negligent because as a partners should also take active participation in the partnership affairs.
According to the partnership act, partners should take active participation and be honest in the running of the partnership. This is one of the important agreements of the partnership and as per the case:
This was a case Where Charles was a partner in a firm and was convicted of traveling on a train without a ticket with the intention to avoid payment. The partnership agreement provided for the dissolution of the business by other partners if he was guilty of any flagrant breach of his duties. It was held by the court that his dishonesty fell within the scope of the expulsion clause and the partnership should dissolve.
But in the case of Thomas there was no dishonesty because he was acting well on behalf of the firm so the other partners could also be in a position to contribute to the firm’s losses and liabilities.
A firm is liable for any loss or injury caused to a third party by the wrongful act or omission of a partner if they were done by him while acting in the ordinary course of the firm’s business, or with the authority of his co-partners.
In partnership law, every partner is liable in tort jointly with his co-partners for all liabilities of the firm and he is also liable severally i.e. each individual partner is liable and the plaintiff can sue each partner successively. In case of joint and several liabilities, the plaintiff has several causes of action. He can sue all the partners together, or he can sue them separately as long as his claim under tort remains unsatisfied. For example, while negligently driving the firm’s van on the firm’s business, A injures X. The latter has a right to sue A or any one of his partners or the firm. If he sues A for the tort of negligence, he is not prevented from suing the remaining partners if the judgment awarded by the court against A remains unsatisfied.
It follows from what has been stated above that the firm’s liability, arising out of contracts, differs from the liability arising under tort. The firm is jointly liable for the breach of contract i.e. the plaintiff can sue only once, but for the tort committed by a partner in the course of doing the firm’s business, the firm’s liability is joint and several i.e. the plaintiff has more than one course of action.
On decision making, Thomas could also order the water dispensing machine to become apart from him having the right to incur a debt of £300 on behalf of the firm. It was for the advantage of the firm this is because all partners have the right to make decisions on behalf of the firm and all decisions should be made on majority opinions.
Considering the fact that the partners were three and two of the partners were for the decision, then decision was to through because Charles is enthusiastic about the idea making the decision to be supported by the majority. At the same time major changes must be supported by all partners but this was not general change of business.
Thomas was a general partner because he had the authority to incur debts for the firm though not exceeding £ 300 if he did this for the purpose that is against the ordinary course of business, the firm will not be liable so it was in order for him to consult with the other partners first before renting out the two large spacious rooms at the fitness center and gets an authorized permission from partners and his act ratified by the firm.
In conclusion the relationship between partners should be geared by utmost good faith which means all partners should disclose everything of the firm and each partner should do his task to help the firm and that they should not be competition among partners. Partners should assist each other because this may lead to the dissolution of the partnership, like in the case of
This was a partnership that was making profits but although it was making substantial profits, relations between the partners were so bitter that they refused to speak to each other. Held that the partnership should be dissolved.
Gower, L.C.B. and Davies, P.L. (2006) Principles of Modern Company Law Sweet and Maxwell Jordans Cases and materials in Company law, L C Sealy, Butterworths Heinemann.
Keenan, D. Smith and Keenan’s (2006) Company Law, Longman.
Lowry, J., Dignam, A. and Padfield, (2004) Company Law, Butterworths.
Slorach, J.S. and Ellis, J. (2006) Business Law LPC Guide Oxford OUP.
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IvyPanda. (2021, September 13). Partnership Law for Business Partners. https://ivypanda.com/essays/partnership-law-for-business-partners/
"Partnership Law for Business Partners." IvyPanda , 13 Sept. 2021, ivypanda.com/essays/partnership-law-for-business-partners/.
IvyPanda . (2021) 'Partnership Law for Business Partners'. 13 September.
IvyPanda . 2021. "Partnership Law for Business Partners." September 13, 2021. https://ivypanda.com/essays/partnership-law-for-business-partners/.
1. IvyPanda . "Partnership Law for Business Partners." September 13, 2021. https://ivypanda.com/essays/partnership-law-for-business-partners/.
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IvyPanda . "Partnership Law for Business Partners." September 13, 2021. https://ivypanda.com/essays/partnership-law-for-business-partners/.
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