Adding or removing partners is a common occurrence in partnerships and Limited Liability Partnerships (LLPs). The process involves several legal and procedural steps that must be carefully followed. Changes in partnership composition impact the firm's registration, capital contribution, profit sharing, and management.
This article provides a comprehensive guide on how to add or remove a partner from a partnership, including the eligibility criteria, procedures, documentation, and key considerations. Whether you're looking to bring in a new partner or remove a business partner, understanding the legal framework is crucial.
Table of Contents
What is meant by Addition of Partner?
The addition of a partner involves introducing a new member into an existing partnership firm. This decision requires the unanimous consent of all current partners unless the partnership agreement stipulates otherwise. The incoming partner must possess the legal capacity to enter into a contract, as outlined in the Indian Contract Act, 1872. New partners bring specialised skills and industry expertise, enhancing operational efficiency. Their networks open doors to new business opportunities and markets. Overall, this flexibility enables firms to bring in fresh capital, skills, and expertise to support growth and expansion.
Process Of Addition Of Partners
The process of introducing a new partner involves several key steps:
- Agreement on terms and conditions: The existing and incoming partners must mutually agree on aspects such as profit sharing ratio, capital contribution, roles and responsibilities.
- Execution of deed of admission: A supplementary agreement containing the terms of admission should be drafted and signed by all partners, including the new entrant.
- Capital contribution: The incoming partner must bring in the agreed capital.
- Intimation to Registrar: Form 3 along with the prescribed fee should be filed with the Registrar within 30 days of the change.
- Notification to stakeholders: The firm must inform its bank, tax authorities, and vendors/suppliers about the new partner's admission.
Documents Requirement For Addition of Partners
The following documents are typically required for the addition of a partner:
- A Digital Signature Certificate (DSC) is necessary for e-filing with the Registrar of Companies (ROC).
- Form 3 must be filed to update the LLP agreement, reflecting the new partner’s inclusion.
- Form 4 is used to notify the ROC about the appointment and obtain the partner’s consent.
- A Limited Liability Partnership Identification Number (LLPIN) is essential for all filings.
These documents ensure the smooth onboarding of a new partner while maintaining regulatory compliance under the LLP Act, 2008. of Admission/Supplementary Partnership Deed
Advantages Of Adding Partners in Partnership Firms
The introduction of a new partner offers several benefits to a partnership firm:
- Capital infusion to support business growth and expansion
- Fresh expertise and skills to enhance the firm's capabilities
- Shared responsibilities and decision-making
- Potential for increased profitability and market share
What is meant by Removal of Partner?
Partner removal in a partnership firm or LLP occurs when an existing partner exits, either voluntarily or by a decision of other partners, as per the partnership agreement. The process must comply with the Indian Partnership Act, 1932, which allows removal only if expressly stated in the agreement and with the consent of all partners (except the one being removed). In LLPs, removal must also adhere to the Limited Liability Partnership Act, 2008 and LLP agreement terms.
Why Removal of a Partner May Become Necessary?
The removal of a partner may become necessary due to several reasons:
- Voluntary retirement or withdrawal
- Breach of partnership agreement or trust
- Incapacity or inability to perform duties
- Misconduct or negligence detrimental to the firm
- Insolvency or bankruptcy
- Death of the partner
Steps Involved In Removing a Partner
The process of removing a partner typically involves:
- Serving notice: A notice of the proposed removal, specifying the grounds, should be served on the concerned partner.
- Considering reply: The concerned partner must be allowed to submit a response to the notice.
- Majority approval: Obtain at least 75% approval from the remaining partners through a resolution.
- Executing deed of retirement/reconstitution: The change in partnership should be documented through a formal deed.
- Intimating Registrar: Form 4 with the applicable fee should be filed with the Registrar within 30 days.
- Settlement of accounts: The outgoing partner's accounts should be settled as per the partnership deed or mutual agreement.
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Section 31: Introduction of a New Partner
Section 31 of the Indian Partnership Act, 1932, governs the introduction of a new partner into an existing firm. It stipulates that a new partner can only be admitted with the consent of all existing partners unless the partnership agreement provides otherwise.
Rights and Liabilities of a New Partner
Upon admission, the new partner becomes entitled to share in the profits and is liable for the losses and debts of the firm from the date of their entry, unless agreed otherwise. They have the right to access the firm's books of accounts and to participate in the management of the business. However, they are not liable for any acts of the firm before their admission, unless they expressly assume such liability.
Section 32: Retirement of a Partner
Rights of Outgoing Partner
Section 36: Right to Conduct a Competing Business
Unless restricted by an agreement, a retiring partner has the right to carry on a business competing with that of the firm and to advertise such business. However, they cannot use the firm's name or represent themselves as carrying on the firm's business.
Right To Share
The retiring partner is entitled to receive their share of the firm's assets, including goodwill, as per the terms of the partnership agreement or mutual understanding. They also have the right to share in the profits of the firm until the date of their retirement.
Section 37: Entitled to Claim
The outgoing partner has the right to claim their due share from the continuing partners. If not paid outright, they are entitled to interest at 6% per annum on the amount due.
Liabilities of Outgoing Partner
Section 32(3) and (4): Liability to the third party
The retiring partner remains liable to third parties for all acts of the firm until public notice of their retirement is given. They are also liable for any obligations incurred by the firm before their retirement unless discharged by agreement.
Section 32(2): Agreement of Liability
The retiring partner and the continuing partners may agree to discharge the retiring partner from all liabilities of the firm, but such an agreement is not binding on third parties unless they are aware of it.
Section 33: Expulsion of a Partner
A partner may be expelled from the firm by a majority of partners if such power is conferred by an express agreement between the partners. The power to expel must be exercised in good faith. Unless agreed otherwise, the expelled partner can claim the value of their share as if the firm were dissolved on the date of expulsion.
Section 34: Insolvency of a Partner
If a partner is adjudicated as insolvent, they cease to be a partner from the date of the insolvency order. Their share in the firm vests with the Official Assignee or Receiver appointed by the court. The firm is dissolved unless the solvent partners buy the insolvent partner's share and continue the business with proper intimation.
Section 35: Death of a Partner
In the event of a partner's demise, their legal heirs or executors step into their shoes. The firm dissolves from the date of death unless the partnership deed provides for continuity. The deceased partner's share in the firm's assets, goodwill, and profits is settled as per the partnership agreement or mutual understanding.
Section 38: Continuing Guarantee Revocation
The estate of a deceased or insolvent partner, an expelled or retired partner, is not liable for the firm's debts contracted after their death, insolvency, expulsion or retirement. A continuing guarantee given to a firm or a third party in respect of the firm's transactions is revoked as to future transactions by any change in the firm's constitution.
Conclusion
Changes in the composition of a partnership firm through the addition or removal of partners are significant events. While new partners can infuse capital and expertise, the exit of partners due to retirement, expulsion, insolvency or death can impact the firm's continuity and harmony. The Partnership Act provides a framework for inducting and removing partners. The terms of entry and exit should be clearly documented in the partnership agreement to minimise disputes. Intimations to the Registrar and third parties should be made promptly. With some foresight and planning, partnership firms can manage changes in their constitution smoothly and continue their business journey.
Frequently Asked Questions
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
Frequently Asked Questions
How do I add and remove a partner in LLP?
A new partner can be added to an LLP with the consent of all existing partners. Form 4 along with the supplementary LLP agreement admitting the new partner should be filed with the Registrar within 30 days. For removing a partner, Form 4 along with the supplementary agreement removing the partner should be filed.
Can we add a new partner in LLP?
Yes, a new partner can be admitted to an LLP with the consent of all existing partners, unless the LLP agreement provides otherwise. The admission should be documented through a supplementary agreement and Form 4 should be filed with the Registrar.
How do you remove and add a new partner in a partnership firm?
The best name for your company is one that aligns with your brand identity, business operations, and legal requirements. It should be simple, professional, and free from misleading or offensive words.
Can you remove a partner from a company?
Yes, a partner can be removed from a partnership firm through retirement, expulsion, insolvency, death or dissolution of the firm, as per the provisions of the Partnership Act, 1932.
How do I remove a partner from a limited company?
A partner is associated with a partnership firm, not a limited company. To remove a director from a limited company, the procedures under the Companies Act, 2013 should be followed, which may involve passing a resolution in a general meeting.
How do I add a partner in a private limited company?
A private limited company has directors and shareholders, not partners. To appoint a director in a private limited company, the procedures laid down in the Companies Act, 2013 should be followed, which typically involve passing a board resolution and filing necessary forms with the Registrar of Companies.
How do I remove a partner from a general partnership?
A partner can be removed from a general partnership through retirement (with the consent of all other partners or as per the partnership agreement), expulsion (if such power is conferred by express agreement), insolvency, death or dissolution of the firm. The removal should be documented through a deed of retirement or reconstitution and intimated to the Registrar and third parties.
How do I add a partner to an existing partnership?
A new partner can be admitted to an existing partnership with the consent of all current partners unless the partnership agreement provides otherwise. The terms of admission should be agreed upon and documented through a supplementary agreement. The incoming partner must bring in the agreed capital contribution. Form 3 should be filed with the Registrar within 30 days of the change.
How do I add a partner in a private limited company?
A private limited company does not have partners. It has directors and shareholders. To appoint a director in a private limited company, the procedure laid down in the Companies Act, 2013 should be followed. This typically involves passing a board resolution and filing necessary forms with the Registrar of Companies.
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Mukesh Goyal is a startup enthusiast and problem-solver, currently leading the Rize Company Registration Charter at Razorpay, where he’s helping simplify the way early-stage founders start and scale their businesses. With a deep understanding of the regulatory and operational hurdles that startups face, Mukesh is at the forefront of building founder-first experiences within India’s growing startup ecosystem.
An alumnus of FMS Delhi, Mukesh cracked CAT 2016 with a perfect 100 percentile- a milestone that opened new doors and laid the foundation for a career rooted in impact, scale, and community.
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