Companies and BusinessModes of Dissolution of Partnership | How to dissolve partnership?

May 7, 20200

This article explains the different modes of dissolution of partnership. Steps and procedure to follow for dissolving a partnership.

Now allow me to tell you that:

How can you legally dissolve a business partnership?

There are countless reasons why you may be considering exiting or dissolving a business partnership.

Whatever the reason, the process of doing so can be legally complex.

6 Steps During & After Dissolution of Partnership

Use the tips to serve as an informal checklist of the necessary steps to follow before, during and after the dissolution of the partnership.

  1. If you have no written partnership agreement in place, any partner can effectively dissolve the partnership without giving notice of dissolution. However, dissolving the business without notice of dissolution of partnership is likely to give rise to disputes, especially when dividing any assets and liabilities.
  2. As such, it is strongly recommended that you consult a solicitor to act as a mediator, so that you and your partners can decide on a mutually beneficial dissolution agreement.
  3. Before giving your partner notice for dissolution of partnership, consider whether there may be any alternative options, like changing the responsibilities of each partner.
  4. If you still wish to proceed with ending the partnership, whether or not you have a written agreement, anyone with whom you are doing business should be notified immediately of the dissolution, including customers, suppliers, and any relevant regulatory bodies. Also, no further business should be conducted in the partnership’s name.
  5. Be sure to carefully review any clauses regarding dissolution in your partnership agreement with a solicitor to ensure that you follow all of the necessary steps for ending the partnership in line with all your contractual duties.
  6. When wrapping up your business affairs, assets and liabilities are usually assumed according to each partner’s percentage of ownership and the terms of the partnership agreement.

There are many legal regulations that must be complied with in full when liquidating assets, collecting debts, and distributing profits, so specialist legal advice should always be sought in this regard before undertaking the dissolution.

Also bear in mind that any contracts, leases or agreements between your company and third parties should be carefully reviewed with a solicitor to verify how they will be affected by the dissolution, particularly in the event that the contracts still stand regardless of whether or not the partnership is dissolved.

Once your partnership has been dissolved, you must inform HMRC within 30 days or risk a financial penalty.

If your company isn’t VAT-registered, then you can advise HMRC of the dissolution on your partnership tax returns, but if you are VAT-registered, then your partnership details can be updated online through your VAT account.

Dissolving a partnership can be tricky, and if not handled properly, it’s fairly common for dissolutions to become acrimonious and end up in Court.


Modes of Dissolution of Partnership

Dissolution of partnership firms sometimes look very easy.

But practically it could be complex.

There are many ways for dissolution of partnership i.e:

  • Automatic Dissolution of Partnership
  • Dissolution of Partnership by Agreement
  • Dissolution of Partnership by Court
  • Technical Dissolution of Partnership

Automatic Dissolution of Partnership

We say there are modes of dissolution of partnership automatically.

  1. When a new partner is admitted, or
  2. A partner retires, or
  3. There is the death of a partner.

The Constitution of the partnership changes even during the change in profit ratio.

We say it is the dissolution of partnership business.

However it continues and in case of dissolution of the partnership firm the business is closed.

This may also happen on retirement or a death of the partner.

So in short when the business is closed we call it dissolution of partnership.

And in case the business is continued we call it formation.

And there is a temporary breakdown in the relationship or in the agreement, we call it dissolution of partnership.

Dissolution of Partnership by Agreement

There are various modes of dissolution of partnership.

  1. A firm may be dissolved by agreement when all the partners agree. It can be dissolved by notice.
  2. In case a partnership is at will that means the time of the partnership is not designed. It can be dissolved by giving notice of dissolution of the partnership firm.
  3. Any partner can give a notice and it can stand dissolved.
  4. When all the partners become insolvent.
  5. The term of partnership has expired.
  6. When the compulsory resolution is there when the business becomes legal the court can also pass an order for dissolution of partnership.

Dissolution of Partnership by Court

There are various grounds on the basis of which the court can pass an order.

  1. When a partner becomes insane and disable to perform the business of the firm.
  2. When a partner proves to be guilty of misconduct regarding the affairs of the business.
  3. When a partner fails to perform the act according to the terms of the partnership agreement or guilty of breach of the agreement. 

Any partner can go to the court if other partners are disobeying the terms of the agreement or they are doing certain acts which are against the interest of the firm.

Court can pass an order for dissolution of partnership when a partnership firm is dissolved, the assets are disposed of and the liabilities and other dues are paid.

In this order first of all the expenses of dissolution are to be paid and thereafter outside liabilities partners loan, if any.

And finally capital and current account to the partners.

Technical Dissolution of Partnership

A partnership may technically be dissolved in the following circumstances:

  1. When a new partner joins the partnership firms.
  2. When an old partner sells his shares.
  3. When any partner becomes bankrupt.

Accounting Procedure of Dissolution of Partnership

Now let us proceed with the accounting procedure of dissolution of partnership in order to close the books of the firm, the following accounts are prepared:

  1. A realization account: A realization account, this is the basic account. This account is prepared to close the assets liability and also to record the sale of assets payment of liabilities and expenses of realization.
  2. Sale of assets: Sale of assets, that is after selling the assets and payment of outside liabilities.
  3. Payment of Loan: The loan is to be paid, the double-entry is completed and partners capital accounts are prepared. These are personal accounts basically prepared to find out how much balance is due to the partner or from the partner.
  4. Cash in Bank: Finally the cash in the bank account. The balances are closed. The main account is a relation account.

Let me proceed to see how entries are made in the realization account.

This is the major account and this account as I told you earlier is prepared to close assets.

The assets are closed by putting on the debit side.

All assets are divided.

These are closed by creating.

And the relation account is debited outside liabilities we have credit balance and these are closed by debiting outside liabilities and crediting realized in account, these are outside liabilities.

You will see these in the balance sheet bills favored creditor bank loan expenses outstanding Provident Fund and even wife’s loan is treated as an outside reliability.

The provisions also have credit balance.

These may appear either on the liability side or may also be there on the asset side like provision for doubtful debts.

These are closed diverting provisions and credited relation accounts.

These are provision for doubtful debts provision for depreciation investment fluctuation fund and joint life policy after closing assets and liabilities.

We proceed to dispose of assets when an asset is sold, bank account debit realizing account credit and if an asset is taken over partners capital account debit.

Now the liabilities are paid, payment of liabilities the net amount paid is recorded relative to the bank and if it is paid by a partner realization expenses and closing relation account there is a profit divided in the old ratio and transfer to the capital current account or capital account shown.

If there is a loss the reverse entries past this was a structure of realizing account.


Settlement of Accounts on Dissolution of Partnership

Settlement of accounts on dissolution of partnership is necessary because maybe there is a dispute, maybe there is fighting among the partners, there could be lost making business potential death of a potential partner.

So these are the causes of your closing down a business.

There could be negative reasons, there could be positive reasons like business has grown a lot bigger so you can’t continue as a partnership anymore.

That’s why you are converting into a private or public limited company.

These are the reasons of your partnership dissolution but think realistically if you closed down your business,

What do you do?

You sell all your assets if there is any liability.

You settle it and any money into the bank you take home proportionately.

Yeah there should be no capital balances, no current account imbalances and no bank balances. The biggest business is closed just to show you whether you are asked to not in the exam.

You need three accounts simultaneously.

  1. One is a realization account.
  2. Second is capital account.
  3. Third is the bank account as in this particular question is the AQA accounting level.

Let’s talk about a little bit of our realization capital and back then we’ll begin the question properly.

Realization is a credit account, if you have a game you’re right over there if you have a loss it goes automatically there. 

But I will tell you the easier way of doing the realization.

Capital is always a credit account; there is no doubt.

Bank account is a debit account, so up on the debit side down on the credit side.

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