Compliances

Change in Profit Sharing Ration of Partners

One of the forms of reconstitution of the firm is Change in Profit Sharing Ratio among Existing Partners. Here there is no change in the partners carrying on the business of the firm. The only change is the profit sharing ratio among existing partners.
Without any admission or retirement of the partner, sometimes the partners may decide to change their existing profit sharing ratio. This may result in the gain to a few partners and loss to others. The partners who are in profit due to this change should compensate the sacrificing partner/partners in the profit sharing ratio.

• New Profit Sharing Ratio
  

  The ratio at which the partners decide to share profits / losses in future

• Sacrificing Ratio
  

  The ratio in which the partners have agreed to sacrifice their share of profit in favour of other partners

  Sacrificing ratio = Old Ratio – New Ratio

• Gaining Ratio
  

  The ratio in which the partners have agreed to gain their share of profit from other partners

  Gaining ratio = New Ratio – Old Ratio

• Subsequent Adjustments

  Hence for this purpose, in the books of the firm, few adjustments are made. These adjustments are:-

  • Revaluation of assets and liabilities;
  • Adjustments of reserves accumulated profits, and losses if any etc.
  • Adjustment for goodwill 
• Adjustment for Goodwill
  

  At the time of reconstitution of a firm, Goodwill is also one of the special aspects which require adjustment. The gaining partner pays the sacrificing partner the proportionate share of goodwill which is equal to share gained by him

• Revaluation of Assets and Liabilities
  

  At the time of reconstitution of the firm, re-valuation of the assets and liabilities is done. Revaluation of assets and re-assessment of liabilities is done because:

  • To bring the assets and liabilities at their correct values in the books
  • Unrecorded assets and liabilities of the firm are brought into the books of the firm
  • To ascertain the actual position of the firm.
  • Profit and loss arriving on account of such revaluation up to the date of reconstitution may be adjusted in the partner’s capital accounts in their sacrificing ratio
• Adjustments of Reserves, Accumulated Profits, and Losses
  

  Any reserves or accumulated profits/losses appearing on the balance sheet should be transferred to the partner’s capital accounts. If the partners decide to leave them undisturbed it is necessary to make an adjustment entry in the books of the firm. In that case, the share gained by the gaining partner, he must compensate the sacrificing partner that share of profits and reserves which is proportionate to him.

Step to be taken to give effect in LLP Agreement:

• Pass resolution to affect the change
  

  To effect any changes in the Limited Liability Partnership, the Partners shall pass the resolution at the meeting of Partners as required by the LLP Agreement of concerned Limited Liability Partnership. Further, the resolution shall authorise any of the existing Designated Partner to act on behalf of the LLP and its Partners. Further, the authorised partners shall also hold a valid DSC to file the application to the Registrar.

• Execute Supplement Agreement
  

  The supplement deed to the LLP Agreement shall be executed by the Partners of the LLP including the changes in profit sharing ratio.

  • It should be taken care that the clauses, terms and conditions relating to addition/removal of partner provided in the LLP Agreement are complied with by the supplement.
  • Any additional requirement or clause to can also be inserted or altered or removed through this Agreement.
  • Further, the said supplement deed shall be executed on payment of Stamp Duty as required. The stamp duty payable will be decided based on the capital changed or introduced during the change.
  • In case, there is no addition of the capital in the LLP during the change, the said agreement shall be executed by payment of Stamp Duty amounting Rs 100/- only.
• File an Application for approval of change
  

  As soon as the Supplement Agreement is executed by the Partners for change of partner or their respective designation, an application shall be filed with MCA to approve the changes of partner or the designation. The application shall be filed with the help of a Practising professional including Company Secretary or Chartered Accountant.
  The application shall be filed in the prescribed forms, i.e.

  • LLP Form 3 &
  • LLP Form 4

  The given application shall be filed within 30 days of the effective date of change or execution of an agreement, whichever falls earlier. Failing to file the application within prescribed period.
  However, the said changes will be having retrospective effect to be in force, once approved.