Partnership Firm Closure - Dissolution
Dissolving a partnership firm means ceasing to operate the said partnership firm. All liabilities are settled here by selling off assets or transferring them to a particular partner, settling all accounts with the partnership firm. As they agreed in the partnership deed, any profit/ loss is settled with partners in their profit sharing ratio. Dissolving a firm is different from dissolving a partnership. While dissolving a partnership, the existing partnership is dissolved– by consent or on the happening of a particular event. In the former case, the film ends its name and cannot do business in the future. Still, the firm can retain its existence if the remaining partners enter into a new partnership agreement. There are different ways to dissolve a partnership firm.
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- Closure of Partnership firm from Partnership Act
- Surrender of PAN
- Surrender of TAN
- Surrender of GST
- Firm with no operations
- Firm without any third party transactions
- Firm with no employees
- Firm with no registration under GST, VAT and other tax departments
- Purchase of Plan
- Expert Assigned
- Preparation of name removal Documents
- Filing with Department
Name, Contact Number and Email Id of all the Stakeholders.
Directors Identification Number, if already.
Self Attested PAN, Aadhar & Passport size photo of all the Stakeholders.
PAN, TAN, COI, Share Certificates of the Firm.
NOC from commercial departments
Letter of account closure from bank
Previous Year's Audited Financials & Tax Reports
Complete walk through process for legally closing your Partnership Firm!
Dissolution of Partnership Firm Vs Dissolution of Partners
Dissolution of Partnership Firm Vs Dissolution of Partners
The dissolution of a partnership firm is different from the dissolution of partners. In the dissolution of a firm, the partners stop all the business activities within the firm. At the time of the dissolution of the firm, the assets are used to repay the debt. The dissolution of partnership refers to the termination of all legal and contractual ties between the partners of a firm. This can happen when one of the partners retires and the other partners continue to run the business.
According to the Indian Partnership Act, 1932, the dissolution of a partnership can take place in many ways mentioned in Sections 40, 41, 42, 43, and 44. The dissolution of partnership also can be done without the intervention of the court, as mentioned in Sections 40, 41, 42, and 43.
Consequences of a Dissolution of a Partnership
Consequences of a Dissolution of a Partnership
- The dissolution ends the partnership ties between partners
- It changes the dynamics of the mutual relations of the partners
- The dissolution of Partnership doesn’t end the relations or the business of the firm
- It doesn’t necessarily lead to the existence of the firm as a different entity
- Though one of the partners who leave gets discharged, the assets and liabilities of the firm remain unchanged.
When Can Dissolution Take Place?
When Can Dissolution Take Place?
The partnership can be terminated by mutual agreement without the intervention of the court by:
- Dissolution by mutual consent of all partners (Section 40)
- Compulsory dissolution due to any unlawful business activities (Section 41)
- Dissolution due to contingent events like the death of a partner or adjudication of a partner as insolvent (Section 42)
- Dissolution by notice of partnership at will (Section 43).
The firm also can be dissolved by the intervention of the court. The Indian Partnership Act, 1932 empowers the court to effectuate the dissolution of a firm in several circumstances. The following conditions can invoke the power of the court to dissolve a firm, as per Section 44.
1. Partner of unsound mind
If it comes to the notice of the court that a partner of the firm is of unsound mind, then legal actions will be taken to dissolve such firm. Otherwise, if one or more partners have been declared mentally unsound or unstable, the court can initiate the dissolution process. However, mental instability is not an absolute ground for dissolution. Moreover, it is not always necessary that the state of instability is a permanent one. Therefore, it can be effectuated only with the consent of the other partners. Other similar circumstances like the character or the nature of the partner’s involvement are also considered to be a ground for dissolution.
2. Incapability or Misconduct of the partner
Incapacity of a partner is when he/she becomes temporarily or permanently unable to discharge his duties as a partner of the firm. If the partner ignores the agreements and performs an illegal or unethical activity, then the dissolution of the partnership can be done on the grounds of professional misconduct. If the partner’s behaviour is not professional or ethical, then the required action will be taken. A partner can be charged with professional misconduct when his ill actions cause harm to the firm.
3. Breach of Agreements
The partnership can be dissolved if the partner has breached the agreements that are related to the management of business affairs. The dissolution of a partnership also can be done when a partner indulges in any other illegal or unethical business activities.
4. Transfer of Shares
If the partner other than the suing partner has transferred or sold his rights and shares to a third party, then the other partners can file for dissolution of the firm, according to Section 44 of the Indian Partnership Act.
5. Runs on Losses
Any business is susceptible to face losses due to unforeseen circumstances. In such cases, the court can choose to dissolve the firm that can no longer churn profits.
6. Other Justifiable Causes
If the court finds any other justifiable and equitable reasons apart from the ones mentioned above, then it has the right to issue an order to dissolve the partnership or the firm itself.
Settlement of Accounts on Dissolution
Settlement of Accounts on Dissolution
Section 48 of the Indian Partnership Act, 1932 gives details regarding the settlement of accounts after the dissolution of such a firm. According to section 48, the following rules are to be followed:
- Losses and deficiencies of the firm must be paid out of,
- Profit amount
- Capital amount
- The proportions in which the partners were entitled to share profits (if necessary)
- Assets of the firm must be distributed in the following order:
- In paying debts of the firm to the third parties
- For paying the firm’s dues to each partner, for advances distinguishable from the capital amount
- In paying each partner the due amount on account of the capital.
The surplus assets must be distributed among the partners in the proportion they were entitled to share the profits.
How to Dissolve a Partnership Firm
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.
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.
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
👉 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
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.
