Admission of a New Partner

Business is the backbone of an economy, and there are many forms of a business entity. In India, a business entity can function as, including but not limited to, a company, partnership business, LLP, Cooperative society. In the partnership form of doing business, two or more like-minded people form a partnership business called a ‘firm’. Starting a partnership firm requires executing a partnership deed and paying stamp duty for the deed of partnership.

Before understanding the admission of a new partner MCQ, one must understand what a partnership firm is. Provisions of the Indian Partnership Act, 1932 primarily govern a partnership firm. And for the matters on which the Indian Partnership Act, 1932 is silent or the matters not covered in the partnership deed, the provisions of the Indian Contract Act, 1872 shall be applicable.

Admission of a new partner often becomes necessary or beneficial to the firm simply because of the new partner’s capital, expertise, or reputation. In such a case, a person can be admitted into the partnership as a new partner through a partnership deed and pay applicable stamp duty.

Who Can Be a Partner?

Generally speaking, any person competent to enter into a contract can become a partner in the partnership business. Other conditions shall be applicable if the original partnership deed lays additional requirements for the new partner. It is worth noting that any illegal provisions or requirements shall not be suitable or binding upon existing partners or the new partner. As per the Indian Partnership Act, 1932, any person of sound mind, who is competent to enter into a contract, has attained the age of majority and is qualified to enter into a written agreement can become a partner in a partnership firm. It includes ‘a person’ as defined by the law.

According to the admission of new partner notes, an individual can become a partner in a partnership business. Trustees can become partners unless their trust deed forbids it. A partnership firm cannot become a partner in another partnership firm. Karta of a Hindu Undivided Family can partner in a partnership firm in his capacity.

Can a Minor Become a Partner?

The law for admission of a new partner MCQ says a minor cannot enter into a contract, so naturally, one would think a minor cannot become a partner in a partnership firm. But, it is not valid. Indian Partnership Act, 1932, Section 30 deals with the admission of minors in partnership. The admission of a minor into a partnership firm as a partner has a few conditions:

• Consent of all the partners is required. A minor person becomes a partner in the firm with the consent of all partners. The guardian executes the agreement on behalf of the minor.
• A minor can become a partner in an existing business. It means a partnership firm must already admit a minor as a partner. Hence, a minor cannot become a partner in a new partnership business.
• A partnership firm cannot have all minors as partners.
• Minor partner is entitled to receive a share of profit, inspect and take copies of books of accounts. But a minor cannot examine any documents other than the books of accounts.
• The limit of the liability of a minor is up to the firm’s share of profit and assets. If the firm is unable to pay the creditor, the personal property and assets of the minor shall not be subject to payment of the debt.
• A minor cannot take an active part in the conduct of the business.
• The minor partner may not sue other firm partners for an account or payment of his share of profits, except in case of severing connection from the firm.
• Within six months of attaining majority or knowing about his admission into a partnership, whichever date is later, the minor shall give public notice of his decision of becoming or not becoming a partner in the firm. If the minor fails to provide any such information and six months have passed from such date, the minor shall become a partner.

Profit-Sharing Ratio

According to the admission of new partner notes, when a new partner enters into an existing partnership business, all the partners’ profit sharing ratio is changed to accommodate the new partner. The partners must mutually agree upon a new profit sharing ratio.

Treatment In Books of Accounts at the Time of Admission of a New Partner

At the time of admission of a new partner, ideally, the assets and liabilities of the firm should be revalued as on the date of admission. The goodwill of the business should be valued and reflected in the books of accounts of the firm. For this purpose, a Revaluation Account is opened in the books of accounts. The resulting profit or loss arising from the revaluation of assets and liabilities is distributed to old partners in their previous profit sharing ratio. The new values of assets and liabilities will reflect in the Balance Sheet as on the date of admission of a new partner.

It may also happen that all the partners, including the new partner, unanimously decide not to show revalued assets and liabilities in the books of accounts. For this, revaluation of assets and liabilities is done without entering the value in ledger books, and resultant profit or loss is distributed in the old partners’ capital accounts in the old profit sharing ratio. A Memorandum Revaluation Account is opened to complete the double entry, and all the entries are reversed in this account to keep the original values of assets and liabilities. The balance of this account is distributed to all the partners, including the new partner in their new profit sharing ratio.

Stamp Duty To Be Paid 

A partnership deed must pay stamp duty as defined under the Indian Stamp Act, 1899. It’s a source of income for the government. Under the law, states can decide the amount of stamp duty on a partnership deed or agreement. The duty through the stamp, which is payable on the partnership deed, is different in India. Some states have provided a fixed stamp duty, and some states have provided a stamp duty based on the partnership’s capital. For example, in Delhi, the stamp duty is between Rs. 200 to Rs. 5000 depending upon the money. In West Bengal, it is Rs. 150. In Uttar Pradesh, it is Rs. 750. Himachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim, Rs. 100. In Haryana, it is Rs. 1000. One should verify the applicable stamp duty payable on the partnership agreement or deed from the registrar office of their respective state.

Conclusion

Although not legally mandatory, it is better to get the partnership agreement or deed registered with the registrar of firms and duly notarised to make it more legally binding. Admission of a new partner is for the benefit of the business. The new partner or partners bring in money in the form of capital, and one may need their expertise for the business’s advantage. Although a standard partnership agreement is available on the internet, hiring a professional to draw a contract and provide a legal opinion is advisable.