Dissolution is a legal term which could have several different meaning, depending on the situation in which it is used. In relation to a legal arrangement or contract, it means termination or dissolution of a lawfully binding relationship like a vendor-supplier or partnership agreement. Let us know more about the dissolution of a partnership firm in the following paragraph.
A distinction should be made between the dissolution of partnership’ and dissolution of firm. Dissolution of partnership implies the termination of the original partnership agreement or change in contractual relationship among partners. A partnership is dissolved by the admission, insolvency, retirement, incapacity, death, expulsion, etc. of a partner or on the expiry/ completion of the term/venture of partnership. A partnership could be dissolved without dissolving the firm. In dissolution of partnership, the business of the firm does not come to an end; the remaining partners continue the business by entering into a new agreement. On the other hand, dissolution of firm implies dissolutions between all the partners. The business of the partnership firm comes to an end. Its assets are realized and the creditors are paid off. Thus dissolution firm always involves dissolutions of partnership but the dissolution of partnership does not necessarily mean dissolution of the firm.
A partnership firm may be dissolved in any of the following ways:
When a partnership firm is dissolved, its assets are disposed of and the proceeds there from are used in paying the credits and if the amount realized by sale of the assets is not enough to pay the debts or pay to the creditors in full amount, the deficiency could be recovered proportionally from the personal properties of the partners.