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 organization 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

What is the dissolution of Partnership?

The dissolution of a partnership means termination or end of every contractual tie between partners. This indicates that the operation of a partnered company is suspended and the assets are issued to fund a different set of liabilities. 

But, there is a distinction between these two concepts (dissolution of partnership and partnership firm). Dissolution of partnerships means the end of the partnership business, whereas, dissolution of partnership firm indicates the termination of the partnership among the partners and the firm. Suppose, if a current partner expires, retires, and is unable to settle the debt then rest of the partners can buy the share percentage of the departing partner and resume the operation of the firm under the same title.

When Partnership is Dissolved?

The partnership is dissolved when a new partner is added or when a current partner leaves or retires from the partnership, dissolution of a partnership is said to come into the picture. Regardless of the change in the partners’ composition, the remaining partners determine to continue the business concern. 

To put in other words, since there is a change in the partners, the partnership that prevailed among the partners prior to the change, is said to be dissolved. However, the point worth noting here is that the new enterprise takes the liabilities and assets of the old enterprise. Dissolution of partnership does not add to any discontinuation in the business concern. This, a few times, is known as a technical dissolution.

The partnership may dissolve in any of the below-mentioned ways :

  • Change in current profit sharing ratio (PSR) among partners
  • Admission of a partner
  • Death of a partner
  • Retirement of a partner
  • Completion of the deal, if a partnership is established for that
  • The bankruptcy of a partner
  • Expiry of the partnership period, if a partnership is for a particular time frame

Students can also refer to Basic Concepts of Accounting for Partnership

How a partnership is 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 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 operating unlawful 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 a court 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.

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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