CA Foundation Exam June 2023 » CA Foundation Study Material » Accountancy » Death of a Partner

Death of a Partner

One of the biggest challenges one faces while running a business in partnership is the death of a partner. This article will explain how one can navigate his business and assets in case of the death of a partner in a partnership.

When there is a death of the partner, the partnership comes to an end right away, though the firm will continue to work. But the firm or business may continue with the remaining partner(s). However, this does not refrain the deceased partner from getting the share. However, the partnership is formed with two or more people with a common goal to earn revenue. But the fundamental structure tends to change if one of the existing partners retires or dies. The partnership generally terminates with the death of a partner in a partnership. This means one partner has to fulfil the remaining obligations, pay all the debts and divide assets and profit among themselves.

What Happens After a Business Partner Dies?

In a lot of cases, the surviving partner decides to continue the business or buy the shares of the deceased partner later. The legal representatives would receive whatever the profits of that person’s firms were. The tenure to take ranges from 1 to 365 days. Luckily, the business doesn’t necessarily have to dissolve. In case of death of a partner, The firm can continue, but some legal partnership agreements cover what will happen when a partner becomes incapacitated, leaves, or dies. In the absence of any agreement, all the accounts should be prepared on the date when profits and losses were being made.

A Partner’s Capital can be Adjusted

The following are debited in the death of a partner in the partnership fund of the deceased person’s account-

  • The losses occurred in the revaluation of liabilities and assets
  • Shares in successive losses
  • All the drawings made by the deceased person
  • The total interest levied on such drawings

Also, the following are credited in the account of the deceased:

  • Intrest in the capital
  • Goodwill
  • A share in successive earnings
  • Share in life policy that was designated to them
  • Total money lent by partner
  • Total earnings and reserves that aren’t distributed
  • Total profit generated on the re-evaluation of liabilities and assets

In the death of a partner in a partnership, the legal representatives of deceased partners will take responsibility for the share in successive earnings. They are given the right if they want a share in the total profit. When all these data are collected. The total final amount is paid to legal representatives.

Procedures to be done After the Death of a Member

If any partner chooses to exit, it welcomes a huge chance to change for the entire business that he was once part of. It can be due to many reasons. In such a case partner’s deeds will dominate all the legal procedures. The legal representatives, as stated, indeed will be entitled to a share of the profit in the entity until the partner dies. If there is no provision, the consensus of the rest partners is considered. The accommodation of agreement is done with the already determined statements.

Partnership Deed Agreement

It is a written document legally signed by two partners who decide to run a common firm or business. They will share both profits as well as losses. A partnership deed document will make sure that both parties are away from conflicts and confusion over the partnership norms. In other words, it is also called a partnership agreement. It is up to the partners if they mutually wish to change the deed format. It is a very important element of the partnership as it regulates the liabilities, rights, and duties of each partner involved. It clearly states the roles of every partner in case of any conflicts and misunderstandings amongst partners. Referring to terms and conditions can prevent problems. Any dispute can be handled and settled easily as partnership deeds will determine the conclusion. Apart from conflicts, it will also make a firm eligible for applying for a bank loan, obtaining PAN, obtaining the GST registration, etc.

In the case of Two Partners in the Firm

Section 42 (c) of the partnership act can be applied in the case of a firm where there are more than two: partners. If one dies, the firm dissolves, but the surviving partner will continue the firm, whereas, in the case of a partnership between two, the firm by default comes to an end. And then there is no partnership for any other party to come in. Therefore, there is no scope.

If the deceased partner wishes, the surviving partner can continue the business with the heir of the deceased partner, but then, it will constitute a new partnership. But the partnership death problem is real. Hence, section 42 is not applicable in the case of two partners where one has died. If there are two partners, there’s a dissolution, and with that, a new firm can be constituted with the legal representative of a deceased partner and surviving partner.

Conclusion

Building a successful business takes a lot of effort, planning, and the right execution. Keeping up with its pace is even harder. In the case of the death of a partner, this becomes the breakthrough point. If navigated properly, with the aid of prior planning, it can save your business from losses and help you maintain that pace.