How to Withdraw From a Partnership in India

Last Updated at: Dec 22, 2020
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Partnership

Starting a new business with a partner is exciting, isn’t it? But, as seen at times, things do not quite go as expected. Any of the partners, voluntarily or involuntarily, may decide to call it a day and decide for withdrawal of partnership in India.  Therefore, all the partners in a partnership business plan in advance for a smooth exit route. This will help all the stakeholders to avoid legal entanglements or possible conflicts.

Go through this blog. We will discuss in detail how to withdraw from a partnership or how a partner can withdraw from a partnership.

What is a partnership & partnership firm?

In India, a partnership firm can be by two or more individuals by an oral or written agreement.  Partnership firms are governed by the provisions mentioned in the Indian Partnership Act of 1932. Section 4 of this Act defines partnership as the relation between two or more individuals. Vide this relationship; they agree to share the profits of a business run by all or any of the partners.

A partnership firm is the preferred way of business formation in India

This is not without reason. The annual compliance burden of registered partnership firms is lower as compared to LLPs. There is no need for a partnership firm to appoint an auditor. If the firm is going through the process of registration, it is not necessary to file annual accounts with the RoC. Moreover, a partnership firm is not required to file sales tax, service tax, and taxes depending on turnover. 

Types of  how can a partner withdraw from a partnership

There are two types of withdrawal of partnership-

  1. Voluntary withdrawal of partnership – 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.
  2. Non-Voluntary withdrawal of partnership – 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 on 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.

get partnership registration

Points to consider while deciding how to withdraw from a partnership

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 will mention the date from which the withdrawal will be effective.

Have a Thorough Check of the Partnership Agreement

There are partnerships that involve complex assets. In such cases, you should review the partnership agreement/partnership deed and weigh up your options while withdrawing from the partnership. In the agreement/deed you and your partners must have addressed issues related to dissolution, transfer of interest and withdrawal. Before chalking out your withdrawal plan, you should have a thorough check of the withdrawal provisions mentioned in the agreement. 

It may specify a prohibition period before the expiry of which, no partner would withdraw. It may also mention a time frame within which you need to serve an advance notice regarding the withdrawal to your partners. If you violate such terms mentioned in the agreement, you may invite financial liability against any resulting damage caused to your partners or to the business.  

Distribution of profits and business assets

Proper distribution of profits and business assets after a partner leaves is another important part of the withdrawal of the partnership process. Terms of such distribution are usually mentioned in the partnership deed/agreement.

If the partnership is not dissolved after a partner withdraws, the assets can be distributed as per the profit and loss ratios mentioned in the agreement. It can also be distributed as per the initial capital contributions made by the partners to the business (termed as their individual capital accounts).

If the business is not dissolved on the exit of a partner, the partner can decide to sell his/ her shares to the remaining partners. The exiting partner may also choose to assign his/ her interest to any third party partner.

For more complex withdrawal scenarios, we would advise you to consult legal help