Concept of Admission of New Partner
A new partner may be admitted when the firm needs additional capital or managerial help. Admission of a new partner is the inclusion of a new partner as an associate or partner to an existing enterprise is known as an admission of a partner. Partnership by its name meant that it is an association of partners to endeavor a venture for getting the reward in the form of profit in the days to come. Any change in the existing agreement amounts to a reconstitution of the partnership firm. There are changes to be made in the accounts of the firm like the revaluation of assets, changes in the capital account, etc. For the right to share the profit of the partnership firm, the new partner is required to bring some amount which is known as a premium or his share of goodwill. Such an arrangement can take any of the following forms:
- The new partner brings in new assets
- The new partner purchases interest in the partnership from existing partners at book value
- The new partner pays a bonus for the partnership’s goodwill; and
- The new partner receives a bonus for the partnership’s negative goodwill.
When a firm requires additional capital or managerial help or both for the expansion of its business a new partner may be admitted to supplement its existing resources. During the ordinary course of business, the partnership business may need additional capital, special skill, namely attachment to enhance the goodwill from other parties to smoothly run in the competitive business environment. When because of the same reasons, or for some other importances if a partnership welcomes outsiders as a partner in the business it is called an admission of a partner. With the admission of a new partner, the partnership firm is reconstituted and a new agreement is entered into to carry on the business of the firm. Before giving admittance to a new partner there should be a clear-cut consent between or among the partner for the same otherwise it may cause a reason for the dissolution of the partnership.
During the time of admittance of a new partner, a partnership firm will have a due exercise on the following important aspects:
- Impact of admittance in the profit sharing ratio of the firm
- Impact of admittance in the revaluation of assets and liabilities of the firm
- Impact of admittance in the value of goodwill of the firm
- Rearrangement of reserves and surplus and accumulated losses of the firm
- Adjustment of the life insurance policy of partners
- Re-adjustment of partners capital giving due influence of new admittance
- Guarantee of minimum profit to a partner
- Reservation of old profits to the old partners
- Admission of a partner during an accounting year.