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What is Dissolution of Partnership and Firm

What is Dissolution of Partnership Firm

Dissolution of partnership firm mean the termination of contractual relationship between all the partners. It means an end or closure of partnership business. according to partnership act, if there is a dissolution of partnership among all the partners of a firm. it is a case of dissolution of a firm. Here all the members cease to carry on the business on the close of the business, the assets or liabilities are settled as per agreement.

Dissolution of a firm:

Dissolution of partnership firm and dissolution of partnership are two different terms. dissolutions of the partnership firm is the closure of partnership business. here all the partners cease to carry on the business. the relationship between all the partner of a firm is broken so as to close the business of the firm.

Dissolution of Partnership:

Dissolution of partnership is the end of partnership only. if one partner of a firm dies retires or adjudged insolvent. the remain partners may agree to continue the firm under the same name. the remaining partners may purchase the shares of the outgoing or deceased partner by signing a fresh agreement. The firm can thus continue its business. We thus conclude by saying that dissolution of partnership may or may not include the dissolution of the firm. But the dissolution of the firm includes the dissolution of partnership

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Dissolution of Partnership
Dissolution of Partnership

Modes of Dissolution of a Firm:

Dissolution by Agreement : Partnership is created by the agreement. Similarly existing partners can dissolve by another agreement.

Dissolution of Notice : When the partnership business has no fixed time or it is at will, any partner can dissolve the firm the firm by giving a written notice to all partners. Dissolution will be effective as mentioned in the notice.

Dissolution at Any Time : In spite of partnership deed, partnership can be dissolved at any time under the following conditions:

  1.  If a partner becomes unable to take up his responsibility as per the partnership deed.
  2. If a partner did not pay the amount payable to the firm or transfers his share to another person without the consent of remaining partners.
  3. If the right of a partner is taken over by a court for compensation.
  4. If any partner committed forgery of negligence.
  5. If any partner is sentenced to prison.


Dissolution After the Expiry of Time : As per the partnership deed a partnership will be automatically dissolved immediately after the expiry of the fixed period or on the completion of the specified job.

Immediate Dissolution : The death of insolvency of any partner will immediately dissolve the partnership.

Dissolution by Concerned Department : The concerned department can dissolve the firm under the following conditions:

a. If the firm is not renewed within a prescribed time.
b. It the partners apply in the concerned department for dissolution with reasonable causes.
c. If the firm does not provide accounts and progress report within specified period when demanded.
d. If the firm operates unlawful works or violates the rules and regulation of the Act.

If concerned department dissolves partnership firm except in case (b), the partners of the firm cannot register similar type of partnership for one year.

Settlement of Accounts on Dissolution of a firm

When a firm is dissolved, the assets of the firm are realized and are used in the following manners.

  1. The outside creditors are paid at the fir instance
  2. The balance amount if any is used to return loans of the partners.
  3. If there is any surplus, it will be used to return the capital contributed by the partners.
  4. Still if there is balance it will be paid to partners in their profit sharing ratio.
  5. In case a partner is insolvent, the deficiency is met by solvent partners in their capital balance ratio.
dissolution of partnership
dissolution of partnership

About the author

Salman Qureshi

Salman Qureshi is an Accountant by profession & he loves to write on Commerce & Management Sciences Subject to assist Students. Hope you guys will like his effort.

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