A partnership firm is formed when two or more individuals agree to share profits and losses according to a predefined ratio. However, there are occasions when partners may choose to dissolve the firm, effectively closing the business 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.
Dissolution of Partnership
Dissolution of partnership and dissolution of the partnership firm are two different concepts. The dissolution of a partnership means a change of business relationship between partners whereas the dissolution of a firm means dissolving of the firm along with the relation between partners. In this case, all the assets and liabilities are settled and appropriately disposed.
Dissolution of partnership is said to take place when one of the partners associated with the business, ceases to be a part of the business going forward. It is very different from the termination of partnership. Dissolution can be defined as the process that ultimately leads to the termination of partnership. After dissolution, the remaining partners carry on the partnership but, this partnership is a completely new and different partnership.
Reasons for Dissolution of partnership
- Death of a partner.
- Admission of a new partner.
- Insolvency of an existing partner.
- Early retirement of a partner.
- Due to expiry of a partnership period after a certain time as mutually agreed upon by all partners.
Difference Between Dissolution Partnership and Dissolution of Firm
| Basis | Dissolution of Partnership Firm | Dissolution of Partnership |
|---|---|---|
| Conclusion of business | The business gets concluded | The business continues |
| Assets & Liability | Assets are realized and liabilities are paid-off | A revaluation of assets and liabilities is done |
| Court Intervention | The court may or may not intervene | No intervention by court since it is a mutual decision |
| Relationship | The relationship between partners does not exist | The relationship between partners shall exist |
| Account settlement | A closure of books is required | No closure is required since the business exists. |
Procedure for Dissolution Of Partnership Firm
Once the firm is dissolved, it stands restricted from any transactions afterwards. As per section 39 of the Indian Partnership Act 1932 states that the complete dissolution among all the partners leads to dissolution of the partnership firm. Following is the procedure for dissolution of partnership firm.
- Dissolution by agreement
- Mutual consent: When all the partners mutually decide to dissolve the firm. This is considered to be the most smooth and convenient process of dissolution.
- Existing contract: If a dissolution contract pre-exists between the parties, the firm shall dissolve accordingly. This may include previously agreed-upon conditions and dissolution procedure.
- Compulsory dissolution
- Insolvency of partners: If all the partners or all partners except for one becomes insolvent, the firm shall dissolve. They are no longer capable of entering into any contract.
- Illegality of business: Once the firm activities become illegal, dissolution is compulsory.
- Unlawful activities: When occurrence of some events that makes the firm unlawful, the firm shall dissolve. Events such as if a partner is from another country and India starts a war with that country, they are considered enemies and no business can continue.
- Dissolution due to specific contingencies
- Fixed term or particular venture: The firm shall dissolve if it is framed for a specific period of time or for a particular project. On the expiry date, the firm shall dissolve.
- Death or insolvency: If a partner dies or becomes insolvent, it leads to dissolution of the firm.
- Dissolution by notice: When the partnership is formed at will, it gives flexibility to any partner to send a notice to the other partners indicating that he intends to dissolve the firm.
- Dissolution at court: Court has the right to order dissolution of a firm on the following grounds
- Mental or physical incapability
- Misconduct
- Breach of Partnership agreement
- Transfer of interest
- Unsustainable operations
- And all other grounds the court deems equitable.
FAQs
What is the dissolution of a partnership firm?
The dissolution of a partnership firm refers to the termination of the partnership business, where the firm ceases to exist. It involves winding up the firm’s affairs, settling its liabilities, and distributing the remaining assets among the partners.
What are the different types of dissolution of a partnership firm?
- Voluntary Dissolution by Mutual Consent – When partners mutually agree to dissolve the firm.
- Compulsory Dissolution – Due to legal reasons, such as insolvency of all partners or the firm’s business becoming illegal.
- Dissolution by Notice – If the partnership is at will, one partner can give notice to dissolve the firm.
- Dissolution by Court Order – If partners cannot agree, the court may order dissolution on various grounds like misconduct, incapacity, or breach of agreement.
