Dissolution of Partnership

A partnership is a kind of business where a formal agreement between two or more people is made and agreed to be the co-owners, distribute responsibilities for running an organisation and share the income or losses that the business generates.

In India, all the aspects and functions of the partnership are administered under ‘The Indian Partnership Act 1932’. This specific law explains that partnership is an association between two or more individuals or parties who have accepted to share the profits generated from the business under the supervision of all the members or behalf of other members.

In this agreement, all the rights and responsibilities of each partner who has set up the business. The partnership agreement features the names of both the parties or partners, the purpose for which the partnership is founded,  place of business, each partners investment amount, and sharing of profits between the partners.

However, this partnership can be dissolved only when some predefined provisions, according to the Partnership Act of 1932 are matched, such as:

  1.   Dissolution by Agreement
  2.   Dissolution by Notice
  3.   Dissolution by the Court
  4.   Compulsory Dissolution
  5.   Conditional Dissolution
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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. 

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Reasons for Dissolution of partnership

There can be several reasons for the dissolution of a partnership, which are mentioned below:

  1. Death of a partner.
  2. Admission of a new partner.
  3. Insolvency of an existing partner.
  4. Early retirement of a partner.
  5. Due to expiry of a partnership period after a certain time as mutually agreed upon by all partners.

Students can also refer to Basic Concepts of Accounting for Partnership

How is a partnership dissolved?

Generally, a partnership terminates or dissolved when a partner discontinues participating in the business operation. The dissolution can happen in three different ways.

  • By an act of the partners- When a partner agrees to dissolves partnership at a particular time. For instance, partners can come to an agreement that a partnership should continue for a span of five years. The partners can dissolve the agreement at the end of the five (5) years. Sometimes, it can be mentioned that a partner can be suspended under a specific condition. If a partner breaks a rule, then this can dissolve the partnership. 
  • By operation of law- A Partnership is a consequence of an agreement which is governed by the law. Therefore, any hindrance to the agreement or unlawful operating of business can cancel the partnership contract. For instance; you cannot make a valid partnership for selling illegal things.

Do you know? Accounting treatment for a partnership

  • By court’s decree- A partner can demand partnership dissolution, and the law will allow the dissolution only under this conditions: a partner’s incapability to work; breach of the agreement by a partner; when a partner is mentally unstable; and the misbehaviour of a partner that impacts the partnership.
  • Statement of Dissolution –  This is done by filing the statement to the state’s secretary. The form can be taken from the website of the secretary of state. The form must have the partnership name, date and reason of dissolution.
  • Personal Notification- This can be done by giving personal notice to the partnership’s creditors. Also, inform who is associated with the partnership by publishing the notification in a newspaper.
Important Topics in Accountancy:

The above mentioned is the concept that is explained in detail about the Dissolution of Partnership for the Class 12 Commerce students. To know more, stay tuned to BYJU’S.


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