Difference Between Dissolution of Partnership and Dissolution of Firm

Dissolution of Partnership is not equal to the dissolution of partnership firm. It is due to the fact that when the jural relation present between all partners, comes to an end, it is known as dissolution of firm, however, when any one of the partners become incapacitated, then the partnership between the concerned partner and other partners of the firm, comes to an end, but the firm may continue to operate, if other partners desire so.

The fundamental difference between the dissolution of partnership and dissolution of the firm is that when the partnership is dissolved, there is no other dissolution, but when the firm is dissolved, partnership too comes to an end. Here in this article, we’ve broken down all the relevant facts and differences, take a read.

Content: Dissolution of Partnership Vs Dissolution of Firm

1. Comparison Chart
2. Definition
3. Key Differences
4. Example
5. Conclusion

Comparison Chart

Basis for Comparison	Dissolution of Partnership	Dissolution of Firm
Meaning	Dissolution of a partnership refers to the discontinuance of the relation between partner and other partners of the firm.	Dissolution of firm implies that entire firm ceases to exist, including the relation among all the partners.
Nature	Voluntary	Voluntary or Compulsory
Business	Business of the firm continues as before.	Business of the firm comes to an end.
Economic relationship	Continues to exist but in a changed form.	Comes to an end.
Account	Revaluation account is created.	Realisation account is prepared.
Books of accounts	Books of accounts are not closed	Books of accounts are closed.

Definition of Dissolution of Partnership

Partnership implies the abstract legal relation that exists between the partners. Dissolution of Partnership is, therefore, the termination of the relation between the partners.

This may take place due to the retirement or incapacity of a partner due to insanity, death or any other cause, the partnership, meaning that the relationship between that partner and other partners comes to an end. However, the remaining partners may continue, and thus the firm does not lose its existence. But, when the partners do not undertake the business further, the firm is dissolved automatically.

Dissolution of Partnership can take the following forms:

• Change in existing profit sharing ratio
• Admission of a Partner
• Retirement or Death of a Partner
• Insolvency of a partner.
• Expiry of the term of the partnership.
• Completion of the specified venture.
• Dissolution by agreement.

It is to be noted that when a partnership is dissolved, the old agreement between the partners is terminated and new agreement takes its place.

Definition of Dissolution of Firm

The composite entity for all the partners is called firm. It is the concrete form of all the partners who are linked together. Dissolution of a firm takes place when the jural relation present between all the partners no longer exist, i.e. the partnership between each and every partner of the firm is put to end.

Dissolution of a firm leads to the realisation of assets and settlement of liabilities and the accounts of all the partners are closed. The modes of dissolution of the partnership are discussed below:

• Dissolution without intervention of court
  • Dissolution by agreement
  • Compulsory dissolution
    • Insolvency of all except one partner
    • Business of the firm becoming unlawful
  • Dissolution on the occurrence of certain contingencies
  • Dissolution by notice
• Dissolution by order of court: On the filing of suit by a party, the court may dissolve the firm on the following grounds:
  • Permanent Incapacity
  • Insanity
  • Misconduct
  • Breach of agreement
  • Continuous losses
  • Transfer of interest
  • Just and equitable grounds

Example

• Suppose A, B, C are partners in a firm, B retires, and A and C decide to continue the partnership with a new profit sharing ratio. In this case, there is a dissolution of partnership between B and A, C.
• Suppose A, B, C are partners in a firm, engaged in the business of selling a particular chemical, after that, a law has been passed in which selling of that particular chemical is banned. In this case, the business becomes unlawful, and the firm is dissolved.

Conclusion

By and large, dissolution of the partnership results in, the end of the old agreement between the partners and its replacement with the new agreement. No physical disposal takes place. On the flip side, in the dissolution of the firm assets are disposed off and liabilities are settled.