Particularly for small companies, the most often used form of the structure is a partnership business. The combined effort of two or more individuals to establish a legal entity with the goal of earning profits will create a partnership business. Under the Indian Partnership Act 1932, the partnership firm is governed, and this kind of business organisation essentially depends on trust, co-operation, and understanding among the partners. Creating a partnership company causes knowledge, experience, and capital to be pooled, therefore enabling effective administration.
What is a Partnership Firm?
Two or more people come together in a sort of commercial entity in India to carry out a legitimate business activity with the aim of making and splitting profits. Partnership firms are governed under the Indian Partnership Act, 1932. Mutual agreement, which may be oral or in writing, underpins the relationship among the partners; having a written deed of partnership guarantees legality and clarity, hence it is always advisable.
Each member in a partnership firm is both jointly and severally responsible for running the company; each partner serves as an agent as well as a principal for the company. Mutual agency demands that one partner’s conduct might bind the whole company. Shared among the partners as mutually agreed upon, the profit and loss are divided; their liability is limitless, therefore, they are individually responsible to cover the debts of the company. Small and mid-sized businesses prefer partnership companies since the registration of one is simple and its management style is adaptable.
Essentials of a Partnership Firm
A partnership firm is one of the major modes of business organisation found in India. It is governed by the Indian Partnership Act 1932. A partnership firm can be described as a venture where two or more people join to conduct a business for profit. The basic requirements of a partnership firm are described below:
- Group of two or more individuals: A partnership forms a minimum of two persons. A maximum of 50 partners is imposed according to the Companies Act, 2013.
- Agreement between partners: It is created out of an agreement rather than a status. This agreement can be oral or written. In fact, it is always good to put the whole aspect of the partnership in writing. This will form the deed of the partnership.
- Existence of Business: A partnership should be formed in order to engage in legal business. This does not include activities such as charity work or social organisations, which are not for profit.
- Sharing Profits: Profit-sharing ratio among the partners is an essential aspect of every partnership. Loss sharing will be presumed, unless otherwise contracted. Profit-sharing ratio alone will not determine the formation of a partnership.
- Mutual Agency: Mutual agency provides a basis for collaboration. Each party to a joint agency relationship acts as an agent and a principal, as they have the ability to bind and are bound by other partners.
- Acted by all of them, or by any of them on their behalf: The business activities of the firm can either be carried out by all the partners or by one or more of them on behalf of all, as an indication of trust and confidence.
- Lawful Purpose: The partnership should be formed for a lawful purpose. An agreement containing an unlawful purpose is void and shall not qualify to be a partnership.
- Sharing of Losses: Although it is not mandatory to mention it explicitly, it is presumed that the loss-sharing ratio is also proportionate to the profit-sharing ratio, unless otherwise agreed to.
- Unlimited Liability: Each of the partners has unlimited and joint liability, and that means that they are all personally responsible for the firm’s liabilities.
Reasons For Dissolution of a Partnership Firm
The dissolution of a partnership firm indicates the complete cessation of all business relations among partners and the closure of the business operations of the firm. In India, the reasons for the dissolution of a partnership firm are mainly defined under the Indian Partnership Act 1932, which mentions different circumstances under which a part of a firm might be dissolved.
1. Dissolution by mutual agreement:
The partnership firm can be dissolved at any time with the consent of all the partners. This is the most common method of dissolution and is normally used when the partners choose to stop their business activities together.
2. Mandatory dissolution:
Compulsory dissolution of a partnership shall take place under the following conditions:
- An alteration in legislation or government regulations makes the business illegitimate.
- The partners or all but one of them are declared insolvent.
Thus, in these situations, the continued existence of the company is no longer possible from a legal standpoint.
3. Dissolution upon the occurrence of certain contingencies:
The partnership may be dissolved after the expiration of the specified time, a project is completed, a partner dies, or a partner becomes insolvent, subject to the agreed terms in the partnership agreement. Such occurrences automatically lead one to reach the conclusion of the partnership.
4. Dissolution by notice:
In the case of a partnership at will, the partnership can be dissolved by any of the partners by giving all other partners a notice in writing, specifying the intention to dissolve the partnership.
5. Dissolution by court order:
The court can dissolve the company upon the request of the partners for reasons like:
- Unsoundness of mind of a partner
- Fixed incapacity influencing capability
- Misconduct by a partner prejudicial to business
- Persistent breach of the partnership agreement
- Interest transfer by a partner without consent
6. Continuous losses:
If the company runs into losses over an extended period of time, coupled with the fact that the concern can no longer be run on a profitable basis, the court may, in the interest of the partners, order its dissolution.
7. Just and equitable grounds:
A court can also dissolve a partnership on other grounds it may deem just and equitable. These may include the absence of mutual trust among the partners, deadlock in the management of the partnership business, and irreconcilable differences between the partners.
How to Dissolve a Partnership Firm?
Dissolution of a partnership firm can be defined as the legal end of the partnership relationship among all the partners, resulting in the closure of the business operations of the firm. In India, the dissolution of a partnership firm can be governed by the Indian Partnership Act of 1932. There are basically three ways by which the partnership firm can be dissolved, including voluntary dissolution, dissolution by legal requirements, and dissolution by the court.
1. Understanding the Concept of Dissolution
A partnership may also be dissolved in a voluntary, mandatory, contingent, or court-supervised manner.
2. Examination of the Partnership Deed
First, the partners can refer to the partnership agreement. This usually contains the following information:
- terms regarding the dissolution of the business
- ways the accounting between the partners will be settled
- rights and responsibilities of partners after the dissolution
In the absence of a deed, the provisions of the Partnership Act shall apply.
3. Agreement or Resolution Transfer
In order to dissolve the firm, the agreement or resolution must be signed by all the partners. The contract must state the date of efficacy of the dissolution.
4. Public Notice of Dissolution
In providing in Section 72 of the Act:
- There has to be a public notice of dissolution
- It has to be published through the Gazette and the local newspapers
This has the effect of safeguarding partners against potential liabilities.
5. Notification of the Registrar of Firms
If the firm is registered, then:
- Notify the Registrar of Firms about the dissolution
- Submit the requisite forms.
This makes sure that documents are updated accordingly.
6. Realisation of Assets
All the assets of the firm have to be realised, which includes:
- Sale of stock-in-trade
- Recovery of debts from debtors
- Disposal of fixed assets like machinery and property
7. Payment of Liabilities
The realised assets provide financing for the following:
- Outside creditors
- Loans from partners
- Capital contributions of partners
- Statutory dues and company payments need to be settled.
8. Settlement of Accounts
Accounts are settled in the following order:
- First, losses are satisfied out of profits, next out of capital, and finally
- Firm’s debts to
- Loans
- Return of partners’ capital
- Distribution of Surplus, if Any, Among Partners
9. Disposition of Remaining Assets
The rest of the assets or money is then divided among the partners in their profit-sharing proportions, if there’s no specific agreement.
10. Closure of Legal and Statutory Obligations
The company should:
- Bank account closure
- Cancel licenses and registrations (GST, Shops & Establishment, etc.)
- File final income tax returns
11. Preparation of Final Accounts
Final accounts must show:
- Realisation of assets
- Payment of Liabilities
- Displacement of surplus
It also has to be signed by both partners and should be prepared in advance.
12. Preservation of Records
All business records, account books, and contracts should be kept for future reference.
Conclusion
The dissolution of a Partnership Firm in India is a structured legal process specified under the Indian Partnership Act, 1932. It is designed to ensure equal treatment among the partners and to safeguard the interests of the creditors. A dissolution may occur through the agreement between the partners themselves or the result of the legal and court order-based processes. A good dissolution can result in the minimisation of potential disputes among the partners and financial losses. When dissolution happens in the above manner, the separation between the partners gets a proper legal closure.
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