Updated on: Jun 17th, 2024
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2 min read
Dissolving a partnership firm means discontinuing the business under the name of the said partnership firm. In this case, all liabilities are finally settled by selling off assets or transferring them to a particular partner, settling all accounts that existed with the partnership firm.
Any profit/ loss is transferred to partners in their profit sharing ratio as agreed by them in the partnership deed.
Dissolving a partnership firm is different from dissolving a partnership. In the former case, the firm ends its name and hence cannot do business in the future. But in case of dissolving a partnership, the existing partnership is dissolved by consent or on happening of a certain event, but the firm can retain its existence if remaining partners enter into a new partnership agreement.
There are different ways in which a partnership firm may get dissolved. They are –
It is the easiest way to dissolve a partnership firm since all partners have mutually agreed upon closing the partnership firm. Partners can give a mutual consent or may enter into an agreement for the dissolve.
A firm may need to be dissolved compulsorily if:
Upon happening of certain events, a firm may be required to get dissolved:
If a partnership business is at will, any partner can dissolve the partnership by giving advance notice. Notice will contain a date from which dissolution will be effective.
If any of the partners become mentally unstable or misbehaves with the other partner(s) or doesn’t abide by the clauses of the agreement, the other partner(s) may file a case in the court to dissolve the firm. But a court can dissolve the firm only if it is registered with the Registrar of Firms. Hence an unregistered partnership firm can’t be dissolved by the court.
If any partner transfers control in the form of interest or equity to a third party without consulting other partners, the partner(s) may dissolve the firm.
Until a public notice of dissolution is given, the partners remain liable for any act done by any of the partners which would have been an act of the firm, if such act was done before resolution.
If a partner has been declared insolvent or has retired from the firm, he will not be liable for any acts done after his insolvency or retirement. The legal heirs of any deceased partner are also not liable for any acts done by other partners after the partner has died.
Accounts of the firm are settled in the following order–
If a partner paid a certain premium for entering into a partnership for a fixed term, and the firm is dissolved before the end of the fixed term, the firm is liable to repay the partner his premium amount. But few conditions are attached with this –
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Dissolving a partnership firm involves settling all liabilities and distributing profits/losses among partners. It can be done mutually, compulsorily, or based on contingent events. Dissolution can also occur by notice, court order, or transfer of interest. Liabilities are settled by paying losses from profits, partners' capital, and then dividing remaining loss. Assets are distributed by paying debts, loans to partners, returning capital, and sharing profits.