How to deal with retirement in a partnershipIn the absence of agreement to the contrary, retirement from partnership cannot occur under a general partnership. Instead, the individual must serve a notice to dissolve the entire partnership. If there is more than one remaining partner, they can then reform the partnership. Yet, there are tax implications involved in the process. Show
Allowing provision for a partner’s retirement in a partnership agreement can allow partnerships to continue following the retirement of a partner. Through planning ahead and setting out retirement terms in a well-constructed partnership deed, you can make sure that retirement from partnership is a straightforward process. Your partnership agreementA separate agreement allows you to amend the terms set out in the Partnership Act 1890 so that you have further control over how your partnership is regulated. Regarding the retirement of a partner, a partnership deed should cover return on capital and the interest to be paid. You can set out a specific timescale and terms regarding how the capital is given back to avoid the retiring partner demanding immediate withdrawal. If the office property is owned by the individual, you should also set up an agreement where the space is leased or bought out. Restrictive covenants can be put into place to prevent the leaving partner from carrying on in a similar business within a specific time period or location. You can also choose to set up conditions surrounding retirement allowances, early retirement and the liability of retired partners. Ralli Partnership Law servicesRalli Partnership Law are experienced in drafting up partnership and LLP agreements that deal with the exact requirements of all partners. Through taking such preventative action, you can make sure that the retirement of a partner does not affect the day-to-day running of your business. We also work with partners during the removal, suspension and exiting of a partner, providing specialist legal advice on the best course of action. To speak with a member of the legal team, contact Ralli Partnership Law for a consultation. Skip to content SCC BlogBringing you the Best Analytical Legal News NavigationSite navigation
Partnership1. Section 4 of the Partnership Act, 1932[1](“the Act”) defines ‘partnership’ as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It further goes on to explain that the persons who have entered into partnership with one another are called individually ‘partners’ and collectively ‘a firm’, and the name under which their business is carried on is called the ‘firm name’. 2. The essence of the above definition is that a partnership is an agreement to share profits of a business, and the business should be carried on by all or any one of them acting for all. 3. The essential features of a partnership are:
4. The Supreme Court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. K. Kelukutty[2], has elucidated the essentials of a partnership as:
5. Section 6 of the Act states that while determining whether a group of persons is a firm or not, or whether a person is a partner in the firm or not, regard shall be given to the real relation between the parties, as shown by all the relevant facts taken together. In Laxmibai Roshan Lal[3], the Rajasthan High Court held that a contract merely to take a share of profits, or giving a loan to a person engaged in any trade, upon a contract with such person that the latter shall receive interest along with share of the profits does not necessarily lead to an inference of partnership. Therefore, as a general principle in determining the existence of a partnership, one must not merely see that the conditions of Section 4 are satisfied, but also whether in substance or in essence a partnership was intended. Retirement of a Partner6. Section 32 of the Act deals with the retirement of a partner as under:
The word ‘retire’ in the said section is confined to cases where a partner withdraws from the firm and the remaining partners continue to carry on the business without dissolution as between them. It does not cover a case where a partner withdraws from the firm by dissolution and not by retirement. Sub-section (2) of the said section states that a partner may be discharged from any liability to any third party for acts of the firm, before his retirement, by an agreement made by him with such third party and partners of reconstituted firm, and such agreement may be implied by course of dealing between such third party and reconstituted firm after he had knowledge of retirement. Further, sub-section (3) lays down that notwithstanding retirement of a partner, he and the other partners continue to be liable to third parties for any acts done by any of them which would have been act of the firm if done before retirement until public notice of the retirement is given. However, the retired partner shall not be liable to third party who deals with the firm without knowledge that he was a partner. Dissolution of a Firm7. Section 39 of the Act defines dissolution as the dissolution of partnership between all the partners of a firm. As per the said definition, a firm is said to be dissolved only when all and every one of the members of the firm cease to carry on its business in partnership with each other. 8. The question whether there has been a dissolution of the firm and or upon such dissolution a new firm has succeeded to the business of the old firm, is a question which can be ascertained from the facts and circumstances and documents available. The Supreme Court in Commissioner of Income Tax, West Bengal-III v. Pigot Champan & Company[4], has held that the question whether there has been a dissolution of the firm and upon such dissolution a new firm has succeeded to the business of the old firm is a question which depends upon the intention of the parties to be gathered from the document or documents, if any, executed by and between the partners and other facts and surrounding circumstances of the case. Retirement and Dissolution9. Retirement of a partner from a firm is not equivalent to dissolution of the firm, though if one partner retires in a partnership consisting of two partners, it shall amount to dissolution of the firm. But when a partner retires from a partnership consisting of more than two partners, the partnership is not automatically dissolved. It shall depend upon terms of partnership governing the parties.
So, the retirement of a partner from a firm does not dissolve the firm, but merely severs the partnership between retiring partners and continuing partners, leaving the partnership among continuing partners unaffected.
*Advocate and a qualified Chartered Accountant. Author is currently a Senior Associate in the Dispute Resolution Practice at L&L Partners Law Offices, New Delhi. Author’s views are personal. [1] Partnership Act, 1932 [2] (1985) 4 SCC 35 [3] 1971 SCC OnLine Raj 38 [4] (1982) 2 SCC 330 [5] 1954 SCR 171 [6] 1953 SCC OnLine Cal 98 [7] (2003) 3 SCC 445 [8] 2020 SCC OnLine SC 469 RelatedPost navigation
What does a retiring partner get?At the time of the retirement, the retiring partner is eligible to receive the share of his capital, share of revaluation profit, the share of Goodwill and Reserves.
What happens when one of the partner retires or dies?partner also leads to reconstitution of a partnership firm. On the retirement or death of a partner, the existing partnership deed comes to an end, and in its place, a new partnership deed needs to be framed whereby, the remaining partners continue to do their business on changed terms and conditions.
What problems arise when a partner retires?1 Answer. Change in the Profit sharing ratio.. Adjustment of goodwill.. Treatment of accumulated profits and losses.. Revaluation of the assets and liabilities.. Calculation of the profit and loss up to the date of retirement.. Ascertainment of the total amount due to the retiring partner.. How is partner retirement calculated?New Profit sharing ratio = Old share of profits + share of profits acquired from the retiring partner (gain). Suppose A, B and C are partners sharing profits in the ratio 3:2:1. A retires and B takes 2/6th from A and C takes 1/6th from A.
|