Impact of Admission of New Partner in the Profit Sharing Ratio of the Firm
New Profit Sharing Ratio is the ratio at which the partners decide to share profits/losses in the future. A new partner may be admitted when the firm needs additional capital or managerial help. When a new partner is admitted he acquires his share in profits from the old partners. Whenever an entry is permitted to a new partner it ultimately provides a right to the newcomer to share the profits of the firm in the future. Because of the share given to the newly admitted partner the old profit sharing ratio of the firm definitely changed. Any change in the existing agreement amounts to the reconstitution of the partnership firm. The ascertainment of the new profit sharing ratio will depend on the agreement between the old partners and the new partner. A newly admitted partner acquires two main rights in the firm–
- Right to share the assets of the partnership firm; and
- Right to share the profits of the partnership firm.
The partners often resort to a reconstitution of the firm in various ways such as an admission of a
new partner, change in profit sharing ratio, the retirement of a partner, death or insolvency of a partner. The new partner may get her/his share of future profit either from one partner or from all the partners. In effect, the combined shares of old partners will be reduced.
The following are the cases which may arise while calculating new profit sharing ratio:
- When the share of the new partner is, simply given and nothing is stated about the sacrifice of the old partners.
- When the new partner purchases the share from old partners in their old profit sharing ratio
- When the new partner acquires the share in some agreed or sacrificed proportioned from the old partners
- When the new partner buys the share equally from old partners
- When the new partner purchases the share as a whole from one of the old partners
- When all the partners including the new one decided to share future profit/loss in completely new ratio
One of the forms of reconstitution of the firm is Change in Profit Sharing Ratio among Existing Partners. The aforesaid cases are of relating to the admission of a new partner. But, even if, admission, retirement or death, nothing happens, the disagreement between the old partners due to some other causes may take place and they may decide to their future profit sharing ratio. Some of the cases may occur are as follows:
- One of the old/existing partners acquires the share in some agreed proportion from one or all other partners.
- All the existing partners decide to share future profit totally in the new ratio.
- All the existing partners decide to change one or more than one’s share in the future.