Dissolution of Partnership Firm: 6 Circumstances
Just like other ongoing businesses, there comes a time when the dissolution of partnership firm is inevitable. Below are the 6 circumstances of dissolution of partnership:
1. If partners mutually agree to dissolve
A partnership may be dissolved through a hundred percent vote by partners. A mutual agreement to dissolve could be due to many reasons.
One, partners could feel that the partnership is demanding so much of their commitment and they are losing control in other import areas, personal or business-wise. Two, Partners might conduct a market analysis and conclude that their time, money, and effort to run their business successfully is not worth it.
2. In case of time-lapse of partnership
Some partnerships are created to serve a specific purpose that runs for a specified time. If that time lapses, then the dissolution of the partnership firm is implemented.
Take, for instance, a retail store that partners with a software development company to make a Point of Sale Software. This kind of partnership could be bound to a specified time frame. During this time, the retail store coordinates with the software development company to develop the desired Point of Sale software. Once the software is ready at the time of contract is over, this partnership dissolves.
3. In case of death or bankruptcy
Bankruptcy is among major circumstances of dissolution of partnership that automatically leads to a dissolution. Partnerships also dissolve if a major partner dies, especially for a general partnership. However, if a partner dies or becomes bankrupt in a limited liability partnership, such a partnership might not necessarily dissolve.
The bankruptcy of a partnership firm results in dissolution because there is no money to run the business. When a partnership becomes bankrupt, it struggles to pay salaries, pay creditors, purchase resource inputs and spend on other business functions.
Partnerships are not established for partners to inherit each other. This is why the death of a partner contributes to dissolution. The remaining partners do not become inheritors of what the deceased left in the partnership business.
4. If it’s a court order
A court can order a partnership to dissolve under the following circumstances:
- If the partnership fails to conform with legal regulations controlling partnership firms.
- If a partnership is running a business prohibited by the law.
- When the number of maximum partners is exceeded and the number of minimum partners is not met.
5. In case of disagreements
Continued disagreements that prove hard to solve push for a dissolution of partnership firm.
Continued disagreements halts effective communication. Running the business affairs of the partnership in question becomes equally challenging. Disagreements could be from disputed profit and loss sharing ratio, laxity and dishonesty of some partners, and decision-making, among others.
6. Where a partnership is operating at a loss
A partnership may not make a profit in a given financial year. Partners might strategize and take a different approach to run the business affairs of their company. If losses are suffered consecutively for a certain period, it might drain the partnership capital reserve.
If partners are convinced their company is destined for more losses, it is wise to close such a partnership. Partners share their losses in the ratio of their capital contribution. By dissolution, they avoid running into more losses and debts.
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