Dissolution of Partnership Firm

Updated: May 31, 2024

Dissolution of Partnership Firm:

A partnership is a kind of business where a formal agreement is made between two or more people based on 'The Indian Partnership Act 1932'. The partners are agreed to be the co-owners of the business, distribute their responsibilities for running an organization and share the income or losses generated from the business.
Dissolution of Partnership is to discontinue the business under the name of said partnership firm. This is done by settlement of all liabilities by selling off assets or transferring them to a particular partner and settling all existed accounts with the partnership firm. Also, the profit or loss is transferred to partners in their profit sharing ratio which was agreed by them in the partnership agreement.

There are different ways by which a partnership firm may get dissolved. These include:

Mutual Agreement of Partners:

The easiest way to dissolve a partnership firm is by mutual agreement of partners. In this case, all partners are mutually agreed for closing the partnership firm for which that can give a mutual consent or may do an agreement for the dissolve.

Compulsory Dissolution:

Compulsory dissolution of a firm can be done if:

• The firm is involved in any unlawful activities.
• All partners are declared insolvent.

Dissolution by Notice:

Any partner can dissolve the partnership by giving an advanced notice containing a date from which dissolution will be effective.

Dissolution by Court:

Any partner(s) can file a case in the court to dissolve the firm if any of the other partners misbehaves with the other partner(s) or does not follow the clauses of the agreement. However, this is possible only if it is registered with the registrar of firms.

Third party Transfer of Interest or Equity:

The firm can be dissolved by the partners if any partner transfers control in the form of interest or equity to a third party without consulting other partners.

Other Factors:

A firm can be dissolved for certain events that include:

• Upon expiry of fixed term
• Upon completion of certain task or objectives for which the partnership was formed
• Upon death of the partner if there are only two partners. Other partners may continue to run the firm if there are more than two partners. So, only the partnership will get dissolved, and other partners will have a new agreement in this case.

Settling of Accounts:

Accounts of the firm are settled in the following manner:

• Losses of the firm will be paid out of the profits or out of the capital of the partners. If still losses are not paid off, then the losses will be divided among the partners in profit sharing ratios.
• The third party debts will be paid first to set-off losses of the firm. Then, the loan amount taken by firm from any partner will be repaid to that partner.
• Capital will be repaid to each partner that was invested or contributed by them in the capital contribution ratio.
• The remaining balance amount will be divided among the partners in their profit sharing ratios.
• All assets will be sold off in the market and the cash collected out of such a sale will be used for paying the liabilities.
• The firm is liable to repay the partner his premium amount that was paid by the partner for entering into a partnership for a fixed term and the firm is dissolved before the end of fixed term.