In this article we will discuss in detail how to withdraw from a partnership or how a partner can withdraw from a partnership.
Starting a new business with a partner is exciting, isn’t it? But, as seen at times, things do not always quite go as expected. Any of the partners, voluntarily or involuntarily, may decide to call it a day and decide to withdraw from the partnership. As a result, all partners in a partnership business must plan ahead of time for a quick and painless exit. This will assist all parties in avoiding legal entanglements or potential conflicts. Continue reading to know more about withdraw from a partnership firm.
What Is a Partnership & Partnership Firm?
In India, a partnership firm can be formed by an oral or written agreement between two or more individuals. The provisions outlined in the Indian Partnership Act of 1932: https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf apply to such partnership registration. The partnership is defined in Section 4 of this Act as a relationship between two or more people. They agree to share the profits of a business conducted by all or any of the partners in this arrangement.
Why Is a Partnership Firm the Preferred Way of Business Formation in India?
In comparison to LLPs, registered partnership firms have a smaller annual compliance load. It is also not necessary for a partnership firm to hire an auditor. Additionally, it is also not necessary to file annual accounts with the RoC if the firm is in the process of being registered. And most importantly partnership firms are exempt from GST Filing and other taxes based on certain turnover thresholds.
Ways in Which a Partner Can Withdraw from a Partnership
There are two manners of withdrawing from a partnership:
- Voluntary withdrawal from a partnership firm – In this type of withdrawal, a partner cites personal reasons (like retirement or lack of motivation etc) to withdraw from the partnership. Here, he agrees to give up his share of business voluntarily.
- Non-Voluntary withdrawal from a partnership firm – If for some reason, a partner is forced to withdraw his partnership in the business, it is called a non-voluntary withdrawal. Here, the withdrawal of partnership happens without the consent of the concerned partner. Such a situation arises in the event of the demise of the partner, when he becomes incapacitated or if he has been imprisoned for a crime. Other examples of involuntary withdrawal may include critical illness, bankruptcy or breach of trust/partnership duties.
Points to Consider While Deciding How to Withdraw Form a Partnership Firm
Prepare a withdrawal letter or notice
The complexity of a partnership withdrawal process depends on factors such as the structure, size, and success of the business.
In the case of a general partnership business, the partners participate in day-to-day business operations. They are also jointly accountable for the debts occurring in the business. In such a business, you can simply write a withdrawal from partnership letter, if you want to withdraw your partnership. This letter will serve as a notice of intimation to your other partner (s) regarding your impending exit. The notice must mention the date from which the withdrawal will be effective.
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Review the Partnership Agreement
There are partnerships that involve complex assets. In such cases, you should review the partnership agreement/partnership deed to weigh your options while withdrawing from the partnership.
Moreover, you and your partners must have addressed concerns like dissolution, transfer of interest, and withdrawal in the agreement/deed. Before formulating your withdrawal strategy, make sure you thoroughly review the agreement’s withdrawal clauses.
The deed may also specify a prohibition period before the expiry of which, no partner would be allowed to withdraw. It may also mention a time frame within which you need to serve an advance notice regarding the withdrawal to your partners.
A review of such terms is important because if you break any of the agreement’s provisions, you may be held financially responsible for any damage you may have caused to your partners or the firm.
Distribution of Profits and Business Assets
Proper distribution of profits and business assets after a partner leaves is another important part of the withdrawal process. Terms of such distribution are usually mentioned in the partnership agreement.
If the partnership does not dissolve after a partner withdraws, the assets can be allocated according to the profit and loss ratios specified in the partnership agreement. It can also be divided based on the partners’ original capital contributions to the company (termed as their individual capital accounts).
If the business is not dissolved on the exit of a partner, the partner can also decide to sell his/ her shares to the remaining partners. The existing partner may also choose to assign his/ her interest to any third party partner.
For more complex withdrawal scenarios, we would advise you to engage the legal help of the experts at Vakilsearch.
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