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Dissolution of Partnership Firm: Step by Step Guide

  • Posted By SuperCA
  • On 02 June

Dissolution of Partnership Firm: Step by Step Guide

A partnership firm can be dissolved by a partner at any point of time. In case, the partnership firm is either dissolved or the business is discontinued, then an Assessing Officer will assess the total income earned by the firm as if no dissolution of the partnership firm took place. The procedure for dissolution of a partnership firm consists of selling of all the assets of the firm, settling of accounts and a final settlement of the liabilities of the firm. In this blog, we will know more about the Dissolution of a Partnership firm under Section 189 of the Income Tax Act.

In case of dissolution of partnership firm, any individual who is present at the ending of a partner and the legal representative  of a person who is dead, will be combinedly liable for the penalties, tax amount or any other sum that is payable.


Various modes of Dissolution of partnership firm

The discontinuation or dissolution of partnership firm can be performed in any of the ways that are listed below:


Dissolution by Agreement:

The easiest and the most stress-free way for dissolution of a partnership is by a mutual agreement. In this, the dissolution of partnership firms is done by the approval of all the partners or by making a contract between the partners. The way to form a partnership firm is by drafting a contract and the same can be done to dissolve it. It has been stated in the Dissolution of Partnership Firm By Mutual COnsent clause in partnership agreement that the dissolution can be done by the mutual agreement of all the partners.

  1. Dissolution by Notice: If a partnership is at will, then the dissolution of partnership firms can be easily done by sending a written notice to all the partners regarding the decision of dissolution of partnership firms. This note can not be withdrawn once it has been given until all the partners agree. This type of dissolution can be done by any of the partners once he has issued a proper notice.
  2. Dissolution due to Incidents: The following contingencies could be the reasons for dissolution of partnership firms:
    1. At the expiration of the partnership period. Some partnerships are initiated while keeping in mind a certain time period for which the partnership will exist. These types of partnership firms will be dissolved once their specified time period ends.
    2. At the death of the partner of the firm.
    3. When one or more partners of the firms have been considered as insolvent.
    4. When the project for which the partnership firm was formed gets completed. In such a case, the dissolution of partnership firms may take place.
  3. Compulsory Dissolution: Sometime due to the occurrence of some situations or conditions, the dissolution of partnership firms may be forced and it becomes difficult to continue the firm till the specified time period. The conditions may be:
    1. When all the partners of the firm except one have been concluded as insolvent.
    2.  Or the business becomes illegal to be carried on due to some unexpected occurrences.
  4. Dissolution by Court: A partnership firm carries out its business and works with the involvement of various individuals. It doesn't matter who that individual is. If one or more partners either a relative or a friend or a stranger, end up not being eligible anymore due to a few situations then the court may order for the dissolution of the partnership firm. Some of the occurrences are listed below:
    1. Due to Mental Instability: If a partner of the firm becomes mentally unstable, then a partnership won't be able to operate. In such cases, partners can file a request in the court for dissolution of partnership firms. The partner of the firm who is not mentally unstable can file for the dissolution request in the court which will eventually lead to the dissolution of partnership firms.
    2. Due to Misconduct: If the dissolution of partnership firms takes place by the order of the court, then the most common reason could be the participation of the firm in some sort of misconduct. If partners of one firm do not respect the signed agreements and misbehave in some way with the members of some other firm, then the court has the authority to order for the dissolution of partnership firms. If a partner misses out on some of the clauses of the signed agreement of the partnership even after being warned for a few times, then he might have to face the court. The court may also end up dissolving the partnership firm.
  5. Due to Transfer of Equity: If a partner wishes to dissolve a partnership firm through the orders of the court when another partner transfers his/her share equity of the firm to some third party without having a consultation with any of the other partners.


Responsibility after dissolving the partnership firm

All the liabilities of partners of a particular firm end after the firm has been declared as dissolved but the partners are responsible for any occurrences before the partnership has been dissolved. However, all the partners who have been declared as insolvent or have passed away are free from all the liabilities once the dissolution of the partnership has been performed.