Running a business is never easy. It becomes complicated when you try to be the one-man army. Therefore, people often choose partnerships in business. Partnerships allow better economic support and also more brainpower. This blog – Dissolution Of Partnership Firm – highlights how firms dissolve their partnership.
In India, all the aspects of the partnership are discussed in “The Indian Partnership Act, 1932”. This law tells us that: partnership is an association of two or more people who jointly agreed to share the firm’s profit in consented profit ratio. Now, we all know what a partnership is. But, do we know how the firm dissolves their partnership?
What is Dissolution Of Partnership Firm?
Let us first define the “dissolution of partnership firm”. The Dissolution of a partnership firm is a process in which the partnership between the partners is dissolved or terminated. In case of the dissolution of the partnership of a firm, the firm still exists in the books. The firm will dissolve only when all the assets are being disposed of and liabilities are settled. Only the partnership between the partners is dissolved.
When does the Dissolution Of Partnership Firm occur?
We all know that the firm continues its process even after the dissolution of the partnership. The dissolution of the partnership firm occurs in cases of:
- Death of existing partners.
- Admission of a new partner.
- Changes in profit sharing ratios.
- Expiration of partnership term.
Ways for the Dissolution Of Partnership Firm
Now, we know what is a partnership firm, what is the dissolution of a partnership firm and what causes it. Let us now move on to the ways in which the dissolution of a partnership firm happens.
1. Compulsory Dissolution
Compulsory dissolution of partnership firms takes place in the following conditions.
- The insolvency of all the partners or one partner makes them incompetent to enter into a contract with them.
- When the firm is involved in illegal activities.
- Sometimes, it becomes unlawful for the firm to continue in the business due to some events. For instance, there are two partners who run the business. One is from India and the other is from a different country and suppose that these two countries started the war. Then, the business will be considered unlawful.
2. Dissolution by Agreement
A firm can decide to dissolve its working after taking the consent of all the partners. The firm can, also, have an agreement in which it says that the firm will dissolve on this date. Then, dissolution will take place in accordance with that.
3. When contingencies arise
Following are the contingencies by which dissolution can arise.
- A partner becomes insolvent
- Death of a partner.
- Firms can be created for a particular venture and after completion of that venture. The firm automatically gets dissolved.
- The Firm can be formed for a fixed term.
4. Dissolution by Notice
When the partnership is formed at will, the partner can write a notice to another partner regarding the intention of dissolving the partnership firm.
5. Dissolution by the court
Sometimes it happens that a partner files a complaint of dissolving his partnership firm in court. This happens during the following conditions:-
- When the court considers the dissolution as just and fair.
- The partner becomes insane.
- When a business cannot be carried on with loss.
- The partner breaches the agreement time by time.
- When a partner got involved in some activities which adversely affects the firm’s business.
- The partner shifts their interest from their own firms to a third-party venture.
- When a partner cannot do their job permanently.
Do you know how settlement happens in partnership firms?
No? Then, let us find out.
In case that partnership firm does not have an agreement regarding the dissolution of a partnership firm. Then, the Indian Partnership Act, 1932 will apply.
- The firm will pay the losses, including the deficiency in the capital firstly, through profits. Secondly, out of the profits of partners and lastly by the partners, individually, in the designated profit-sharing ratios.
- The firm shall use its assets to pay out the firm’s debt. Secondly, for paying any loan or advances given by partners and lastly to pay partners’ capital. After all the settlement has been made, the leftover profit shall be shared in the partner’s profit-sharing ratios.
To recapitulate, the Dissolution of a partnership firm is not an easy task. We must comply with many laws and explain to various stakeholders, like shareholders, who have a direct link with the business. All the partners need to agree upon the dissolution before doing it.
This blog is written by Dhron Choudhary. He is pursuing PGDM in supply chain management from Northern College School of Applied Science and Arts. He is an introverted person with a passion for doing exercises like swimming, gym and tennis. Dhron is passionate about finance and want to pursue a career in finance only.