Dissolution of Partnership

A partnership is a legal form of operating a business by two or more individuals. The partners share the profits as well as the liabilities of the business. They take part in running the business and earn remuneration as per their legal contract.

In a broader sense, a partnership can be any endeavour started together by multiple parties. These parties can be governments, existing businesses, non-profit organisations, or individuals. There are three types of partnership business that individuals can opt for. These are – 

  • General Partnership

  • Limited Partnership

  • Limited liability Partnership

Dissolution of a partnership firm occurs in case the partners reach an agreement to liquidate their business venture and suspend all operations associated with it.

What is the Dissolution of Partnership?

Dissolution of a partnership firm signifies the end of a partnership company. It terminates every contractual tie between partners and suspends the operation of the business. Partners distribute their share of profit or liabilities among them.

However, this is not the same as the technical dissolution or merely dissolution of a partnership, which indicates the termination between one or more partners and such firm. For example, one partner has retired, expired, unable to settle the debt or went bankrupt. Then other partners can step forward and purchase his/her shares and keep the operations of such firm ongoing.

When does the Dissolution of Partnership Occur?

A partnership is dissolved when an agreement among partners of an organisation requires change/s. This change can occur due to various reasons. For example, if a new partner is joining the business or an existing partner leaves such a company, it changes the composition of that firm. Then this dissolution of a partnership comes into the picture.

However, a point to remember here is that dissolution of partnership does not necessarily mean the discontinuation of operations of a firm. It consumes the existing assets and liabilities of the old partnership and carries on. Thus, such dissolution is often regarded as technical dissolution.

This dissolution can occur due to various reasons. Some of the primary reasons are –

  • In case any changes are to be made in the current profit sharing ratio among partners.

  • If a partner retires or expires

  • When a new partner joins the business

  • In case a partner goes bankrupt

  • If a partnership was formed for a particular objective or goal and it has been fulfilled.

  • In case a partnership was established for a specific time, then after that period it can be dissolved

Quick Questions

If the partners of a company decide to suspend all its operations and liquidate that business, is it a case of dissolution of partnership or dissolution of a partnership firm?

Ans. – It is a case of dissolution of that partnership firm as the firm ceases to exist.

If a partner expires and that prompts dissolution of partnership deed that existed, is it a case of dissolution of firm or dissolution of partnership?

Ans. – It is a case of dissolution of that partnership, as only the existing partnership relations dissolve but the firm continues its operation.

Ways to dissolve a partnership

Partnerships are dissolved when partner/s decide to put an end to their collaboration. There are various modes of dissolution of a firm or partnership, these are –

1)  Pre-defined Conditions

In case there are any existing conditions mentioned in the partnership deed at the time of its formation like its duration, its objectives and many more. For instance, three partners have agreed to form a partnership venture for ten years. Therefore, at the end of ten years, they can dissolve the firm as per their agreement. 

On the other hand, if the partnership agreement mentions that a partner can be expelled from the business under specific terms and one partner violates those terms, then he/she will be expelled from the company. The partnership can be dissolved due to it.

2)  Laws Governing it

In India, every partnership business is governed by the Indian Partnership Act of 1932. Every such business venture in India has to abide by this law in case of its formation and operations. Therefore, any impediment to an agreement can result in the dissolution of partnership firms as per this governing law. 

Additionally, carrying illegal activities can also result at the end of a partnership business. For example, a legal partnership firm cannot be formed to sell illegally smuggled goods.

Contrarily, in case of the death of one partner, a partnership should be dissolved. Also, in case a partner becomes insolvent, it leads to the dissolution of a partnership agreement.

3)  A Court Order

A partner can apply to the court to dissolve a partnership or firm, and if the court grants this application and issues a decree, then it can be done. However, the court will only issue an order for this purpose under the following circumstances –

  • A partner is unable to perform according to the agreement

  • A partner has breached the terms and conditions of the agreement

  • A partner has been declared mentally incompetent

  • The venture is not profitable

  • Any misconduct of a partner that has harmed the business

4)  A Dissolution Statement

If a partner applies to the secretary of the state and obtains a declaration of dissolution of partnership deed, then a partnership business can be dissolved. Individuals have to get a form regarding it and then submit the duly filled form for this purpose.

5)  Issuing Personal Notification

If a partner issues a personal notification to the creditors of the partnership and notifies everyone who deals with this partnership via newspaper publications. Then a partnership can be dissolved.

What is a partnership Dissolution Deed?

A deed for partnership dissolution is the legal document that allows dissolving a partnership. This deed is available in various formats depending on the condition of this dissolution.

Dissolution of partnership is a broad topic as it comprises several different factors. This article is a brief insight into the matter and covers every aspect of it. If you want to learn more on this topic, visit the official website of Vedantu.

FAQ (Frequently Asked Questions)

1. What do you Mean by Partnership?

Ans: The partnership means collaborating with more than one party for a purpose. In terms of business, it is a type of venture where two or more individuals or organisations are involved in doing business. Their involvement is tied by a legal agreement known as a partnership deed.

2. How to Dissolve a Partnership?

Ans: A partnership can be dissolved via existing terms and conditions of the agreement, a court order, according to the governing laws, a dissolution statement, and a personal notification.