Closing a Partnership

The dissolution of a partnership and the dissolution of a firm follow different processes. The dissolution of a partnership happens when a partner ceases to be associated with the business. The dissolution of a firm refers to the winding up the business.

When a partnership is dissolved, the business of the firm does not come to an end. A new agreement is drafted between the partners that remain. In the case of dissolution of a firm, the business of the firm ceases

Explained below are the conditions under which a firm may be dissolved

  1. Dissolution by Agreement: In this case the partnership firm may be dissolved according to a pre-made contract between the partners.
  2. Compulsory Dissolution: Compulsory dissolution happens under the following circumstances:

(a) When all the partners but one are declared as insolvent

(b) When the business is deemed unlawful due to any of its activities.

  1. Dissolution due to Contingencies:

A firm stands dissolved when any of the following contingencies take place:

  • When the partnership period expires (in the case that it was for a fixed period of time)

(b) On completion of the objective for which the firm was formed.

(c) On the death of a partner.

(d) On the declaration of any of the partners as an insolvent.

  1. Dissolution by Court:

A court can order the dissolution of a firm under any of the following conditions:

(a) Any partner has become of unsound mind.

(b) When a partner becomes permanently incapable of performing his partner duties.

(c) A partner’s misconduct is likely to affect prejudicially the business of the firm.

(d) A partner willfully breaches the terms of the partnership agreement.

(e) A partner transfers his interest in the firm to a third party in an unauthorized manner.

(f) The business of the firm can only continue at a loss.

(g) Any other reasonable grounds justify the dissolution of the firm.