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How to Close a Partnership Firm

How to Close a Partnership Firm

If you want to close a partnership firm, you need to find a way to dissolve it. The process of dissolving a business entity of this kind is called Dissolution of a partnership Form. The process involves the following matters to be taken care of:

  1. Disposing and selling all the assets of the firm
  2. Settling each and every liability that the firm has
  3. Settling the accounts of hte firm.

If, after partnership firm dissolution, any of the assets remain, they are distributed among the partners as per the profit sharing ratio established in the partnership deed.

Therefore, it can be easily said that the decision of closing a partnership firm is a decision that is made collectively by the partners of the said business entity. Through this blog, you are going to know the many ways through which you can achieve partnership firm dissolution.

Closing a Partnership Firm by Mutual Consent

Dissolving a partnership firm through mutual consent is perhaps the easiest and the most coherent way to dissolve such a firm. Now, this form of dissolution is referred to as voluntary dissolution. The reason for it to be called voluntary because the partners mutually agree that the partnership has run its course or it is time for the partnership to end. The process of dissolving the voluntary closing a partnership firm involves the production of “partnership dissolution agreement”. This agreement entails the following terms:

  1. The date that the company was established
  2. The profits that have been made by the firm till now
  3. The division of profits after the dissolution of partnership
  4. The date of dissolving the firm
  5. The reason for the dissolution.
  6. Mutual consent clause of dissolution

The agreement formulated should have the signature of all the partners. Therefore, a partnership business should include mutually respecting partners beforehand if this is the way you are looking for to dissolve it.

Partnership Dissolution by Notice

The chances that both the partners shall agree to closing the firm are quite slim. However, any one of the partners can initiate partnership dissolution by notice. This is a specific notice that is to be filed and forwarded to the Registrar of Partnerships to close down the firm. The notice shall include the following information:

  1. Date of dissolution.
  2. Partner or partners who are seeking dissolution
  3. Other information.

While it might appear to be a simpler way to dissolve a partnership business, it is truly not. When there is a discord between the partners, chances of this notice being challenged are also high. Therefore, one should always be ready with a legal team because one can foresee the challenge happening.

Closing of Partnership Firm by Contingency

There are certain clauses specified in the partnership deed that makes closing the partnership firm important in cases of certain circumstances. It is called Dissolution of a partnership firm through contingency. The circumstances that can trigger the closure are as follows:

  1. The Aim of the partnership is complete
  2. One of the partners has left the mortal coil (death of a partner)
  3. Either one or all the partners have gone insolvent
  4. The partnership period has expired.

The contingencies are specified in the partnership deed. Therefore, there can be fewer or more contingencies that are specified below.

Compulsory Closing of Partnership Firm

A compulsory dissolution of partnership firm happens after the contingencies or the orders from the court. As the saying goes- “A clap requires more than one hand”. Therefore, there can be certain conditions where the court might declare that the partnership if unfit to function. These conditions are as follows:

  1. Mental incapacitation: In case one of the partners is mentally incapacitated, that would result in improper functioning of the partnership business. In this case, other partners have to file an application to the court to close the partnership firm.
  2. Misconduct: Court steps in without warning if the firm has been involved in some sort of misconduct. It can range from breaching the partnership agreement to conducting activities that can be counted as morally wrong. In both cases, the court strikes off partnership firm. However, in this case too, a notice is needed to be filed by the partners of by the court.

Result of Partnership firm closure

In cases where the closure of partnership isn’t because of misconduct, the resultant profits are divided among the partners as per the agreement. However, if the closure is due to misconduct, the equity of the firm is transferred to a third party.

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