Dissolution of a partnership

Dissolution of Partnership

Dissolution of a partnership occurs when the existing relationship between partners is terminated. This could be due to a joint agreement, the expiry of the term, the completion of the venture, or the death, bankruptcy, or insanity of the partner.
Dissolution could also be judicial, where a court declares the partnership as dissolved due to a breach of partnership agreement, misconduct, persistent losses or upon a partner’s request who believes that business can only be carried out at loss.

Upon dissolution, it becomes necessary to realise the assets and meet all the liabilities of the firm.
The responsibility for realisation often rests with a partner, a group of partners, or third-party liquidator.
They’d be in charge of selling business assets, using proceeds to pay off the firm’s debts, and distributing any remaining funds to partners.

When dissolution occurs, partners’ capital accounts would need to be adjusted accordingly.
This involves applying the profit or loss from realisation to the partner’s capital accounts using the profit and loss sharing ratio.

After settling all the liabilities and adjusting capital accounts, any existing balance in the partners’ capital accounts is distributed among the partners.
The balance, whether it be credit or debit, is settled according to the partners’ capital and profit-sharing ratios.

Both legal and accounting considerations are significant when dissolving a partnership.
It is crucial to document all proceedings transparently and abide by all legal requirements to ensure a smooth dissolution process.
Adopting the practice of keeping detailed accounting records can simplify the process of settling accounts after dissolution.

Even after the dissolution, limited liability partnerships (LLPs) might continue to exist.
In LLPs, the partnership itself is a separate legal entity. Therefore, the withdrawal or insolvency of partners does not lead to dissolution.
In these cases, the remaining partners may decide to continue the business under the same firm name. They may also take on new partners to substitute partners who have left the partnership.