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
|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
- Breach of agreement
- Continuous losses
- Transfer of interest
- Just and equitable grounds
Key Differences Between Dissolution of Partnership and Dissolution of Firm
The points presented below explain the difference between the dissolution of partnership and dissolution of the firm, on various grounds:
- Dissolution of Partnership can be defined as the breaking of the relationship between the partner and other partners of the firm. On the other hand, dissolution of a firm is used to mean discontinuance of the entire firm including the relation among all the partners.
- Dissolution of the partnership is voluntary in nature, as it is dissolved by mutual agreement. Conversely, a firm is dissolved either voluntarily or compulsorily.
- Dissolution of partnership does not lead to the discontinuance of business, and so it is carried on by the remaining partners as before. As against this, with the dissolution of the firm, the business carried on by the firm also comes to an end.
- In the case of dissolution of the partnership, the economic relationship between the partners continues to exist but in changed form. On the contrary, in the dissolution of the firm, economic relationship between partners ceases to exist.
- When there is the dissolution of the partnership, revaluation account is prepared in order to revalue assets and reassess liabilities. In contrast, realisation account is prepared when the dissolution of firm takes place.
- The firm’s books of accounts are not closed in the dissolution of the partnership, but the firm’s books are closed along with the closure of partner’s account, in the dissolution of the firm.
- 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.
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.