Partnership firm is the business entity that is formed with a sole purpose of profit from business. Two or more parties come together with a formal agreement (known as Partnership Deed) to own and manage the business. Once the purpose is met or after the partners decide to put in end to the partnership it needs to be dissolved and the partnership comes to an end. On dissolution of the firm, the business of the firm ceases to exist since its affairs are would up by selling the assets and by paying the liabilities and discharging the claims of the partners. The dissolution of partnership among all partners of a firm is called dissolution of partnership firm. This is usually done through a dissolution agreement between the partners.

There are different ways in which a partnership firm may get dissolved-

• When partners are mutually agreed
• Compulsory dissolution
• Dissolution depending on certain contingent events
• Dissolution by notice
• Transfer of interest or equity to the third party
• Partners still liable to third parties
• How are accounts settled
• Premium to be returned on premature dissolution

When Partners are mutually agreed

It is easiest to dissolve a partnership firm since all partners have agreed upon closing the partnership firm. Partners can give mutual consent or may decide on the dissolve.

Dissolution depending on certain contingent events

Upon happening of certain events, a firm may be required to get dissolved:

• Expiry of fixed-term– Partnership formed for a fixed term will get dissolved once the term gets over.
• Completion of task– Sometimes, a partnership is formed for a certain task or objective. Once the task is completed, the partnership will automatically get dissolved.
• Death of the partner– If there are only two partners, and one of the partner dies, the partnership firm will automatically dissolve. If there are more than two partners, other partners may continue to run the firm. In such case, only the partnership will get dissolved, and other partners will enter into a new agreement.

Partners still liable to third party

Partners of a firm remain liable for any act done by partners Until a public notice of dissolution is given. Till then, it will be termed as an act of the firm if done before resolution. If a partner has been declared insolvent or has retired from the firm, he will not be liable for any acts done after his insolvency or retirement. The legal heirs of any deceased partner are also not liable for any acts done by other partners after the partner has died.

How are accounts settled

Accounts of the firm are settled in the following order–

• Losses of the firm will be paid out of the profits, next out of the capital of the partners, and even then, losses aren’t paid off, losses will be divided among the partners in profit sharing ratios,
• Assets of the firm and the capital contributed by the partners to set-off losses of the firm will be applied in the following order–
• Third party debts will be paid first
• Next, loan amount taken by firm from any partner will be repaid to that partner
• Capital contributed by each partner will be repaid to him in the capital contribution ratio
• Balance amount will be shared among the partners in their profit sharing ratios.
• Upon realisation, all assets will be sold off in the market, and the cash realizing out of such a sale will be used for paying the liabilities. Assets or liabilities may also be taken over by the partner(s) for which the respective partner capital accounts will be adjusted by such amount.

Compulsory Dissolution

A firm may need to be dissolved compulsorily if:

• All partners or all partners except one partner are declared insolvent
• The firm is carrying unlawful activities like dealing in drugs or other illegal products or doing business with alien countries or other countries that may harm the interest of India or doing other such activities.

Dissolution by Notice

If a partnership business is at will, any partner can dissolve the partnership by giving advanced notice. Notice will contain a date from which dissolution will be effective.

Dissolution by Court

If any of the partners becomes mentally unstable or misbehaves with the other partner(s) or doesn’t abide by the clauses of the agreement, the other partner(s) may file a case in court to dissolve the firm. But a court can dissolve the firm only if it is registered with the registrar of firms. Hence an unregistered partnership firm can’t be dissolved by the court.

Transfer of Interest or Equity to the third party

If any partner transfers control in interest or equity to a third party without consulting other partners, the partner(s) may dissolve the firm.

Premium to be returned on premature dissolution

If a partner paid a certain premium for entering into a partnership for a fixed term, and the firm is dissolved before the end of fixed term, the firm is liable to repay the partner his premium amount. But few conditions are attached with this –

• Firm isn’t dissolving due to death of a partner
• Dissolution shouldn’t be happening due to his misconduct
• Dissolution is happening on the basis of an agreement that contains no provision for repayment of full or a part of the premium.