Dissolution of Partnership Firm

There may be several reasons for the Closing of Proprietorship Firm. In India, more than 60% of Proprietorship firm not succeeded business due to adverse market situations. Our dedicated team will help you with all the documentation. We extend our support from documentation to preparation and filing.

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Dissolution of Partnership Firm in India

Dissolving Partnership firm means discontinuing the business under the name of said partnership firm and termination or end of every contractual tie between the partners of the firm. There is no law which requires a Partnership Firm to be registered like company and LLP.
A partnership firm may dissolve with the consent of all partners or in accordance with a contract between the partners. On dissolution of partnership firm, every partner is entitled, as against all the other Partners, to have the property of the partnership firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners according to their rights. The Partnership firm can be easily dissolved by cancelling the agreement, surrendering licenses and business registration.

When A Partnership Firm can be Dissolved

DISSOLUTION BY AGREEMENT

An agreement among all the partners can dissolve a partnership firm. Section 40 of the Indian Partnership Act, 1932 allows the dissolution of the firm if all the partners agree to dissolve the firm. An agreement creates a partnership firm, and similarly, it can be dissolved by an agreement. Dissolving a partnership firm requires partners to split the assets and debts of the partnership firm equally.

DISSOLUTION BY NOTICE

If a partnership firm registered at will, it can be dissolved by any partner giving a writing notice to other partners. The dissolution of partnership firm will be effective from the date of the notice, in case no date is mentioned in the notice, then partnership firm deemed to be dissolved from the date of receipt of the notice. A notice once given cannot be withdrawn without the consent of all the partners.

COMPULSORY DISSOLUTION

A partnership firm may be compulsorily dissolved if the following situations arise like insolvency of all Partners or conducting illegal business. Operating an unlawful business can cancel the partnership contract; for instance, you cannot make a valid partnership for selling illegal things

CONTINGENT DISSOLUTION

Section 42 of the partnership act 1932 specified that in case there is no agreement between partners regarding the certain contingencies, the partnership firm will be dissolved on happening of Death of a Partner or Expiry of the Term or Completion of Work or By Resignation by a Partner.

STEPS TO DISSOLUTION THE PARTNERSHIP FIRM

1. Cancellation of GST Registration

If the Partnership firm is registered under GST, it is advisable to surrender the registration before closing the Partnership Firm to avoid the compliance filing burden and an additional fee or fines.

2. Intimation to Registrar of the firm

If the partnership firm is registered, and when a registered firm is dissolved, every partner are required to give a written notice duly signed by all the partners to the Registrar within a period of 90 days from the date of dissolution. The Registrar shall record the notice in the entry relating to the firm in the Registrar of Firms.

3. Cancellation of Shop and Establishment registration

Since Shop & Establishment Registration is granted by Labour Department of the State and in many states it needs to renew every year with a Fee. You must cancel the Shop & Establishment Registration before closing the Proprietorship firm to avoid renewal fee & non-compliance.

4. Surrender of Trade License

Since Trade License is granted by the local municipal corporation and needs to renew every year on or before 31st March with a fixed renewal fees. In case the partnership is about to shut down the business, it is always advisable to move the request to the concern municipal corporation for cancel of the registration.

5. Surrender of PAN and TAN Number

After the dissolution of Firm PAN & TAN number is no more required by the partnership firm. A request letter is required to submit to the local Income-tax officer to surrender PAN & TAN of the Firm after filing the returns and settling off all the pending tax liability.

6. Surrender of Other licenses

If the partnership firm is registered under any other licenses, then it should be surrender immediately before shutting down the business to avoid renewals, other consequence and return filing formalities.

7. Closure of business’s current bank account

You have to close your business’s current bank account and also cancel the cheque book and debit or credit card so that it cannot be misused. For a bank account closure, the partner will have to make the application to the banker.

8. Termination of all other Agreements

If the Firm has been entered any agreement with any party or vendor during the course of business, it is always advisable to terminate those agreements to avoid future consequences and financial liability. For example, if Proprietor has rented a place for business, then the rental agreement must terminate so that you do not have to pay rent in the future.

9. Surrender of Trademark

Surrender of Trademark is known as “Withdrawal of Trademark.” If the partnership firm is willing to give up the rights of Trademark, Firm or any of the partners can submit the letter of Withdrawal to concerned Registry of Trademark to avoid renewal and other oppositions.

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FREQUENTLY ASKED QUESTIONS

What are the rights of the partners after the dissolution of the firm?

Every partner will be entitled to have the property of the firm applied in payment of liabilities of the Firm and thereafter to distribute the surplus, among the partners. Section 46 and 48 are two main sections, which are applicable after the dissolution of the firm regarding the distribution of the assets of the Firm and for settlement of accounts.

What will happen with the assets & liabilities of partnership at the time of dissolution?

After the dissolution of the partnership firm, the firm can’t enter into any transaction with anyone. The firm can only sell the assets to realize the amount, pay the liabilities of the firm. Losses and liabilities of the firm will be paid out of the profits, next out of the capital of the partners, and if losses aren’t paid off, losses will be divided among the partners in profit sharing ratios. The surplus, if any, also distributed among the partners according to their rights or ratio.

My partner is not co-operating in the process of dissolution, what should I do?

There is no fixed answer to this scenario. However, You just write a formal letter as Partner of the firm to another partner that you are dissolving the partnership. The dissolution will be effective from the date of the notice, in case no date is mentioned in the notice, and then it will be dissolved from the date of receipt of the notice.

My partnership firm was registered before the Registrar of Firm, do I need to take permission from the Registrar to close the firm?

No, the permission of Registrar is not required. However, If the partnership firm is registered, and the firm is dissolved, every partner is required to give written notice duly signed by all the partners to the Registrar within 90 days from the date of dissolution. The Registrar shall record the notice in the entry relating to the firm in the Registrar of Firms.

At the time of formation, I brought my personal assets as a capital contribution. Have I dropped my exclusive rights to the said assets?

In a case of a partner bringing his assets in the partnership firm as a contribution to capital, his exclusive rights to the said assets will be reduced to share along with other partners as the property will become property of the firm.

Can we transfer the Registered Trademark of Firm to an individual partner name at the time of dissolution?

Yes, Trademark can be sold or transfer like any other assets of the firm. If any partner wants to buy the Trademark of the firm, it can be transferred by following the rules specified in The Trade Marks Act, 1999.

Do I need to give any public notice before the dissolution of the firm?

Section 45 states the continuing liabilities of the partner to third parties until public notice is given of the dissolution. This section also protects any party engaging with the firm, and also defines the obligation and rights of the partner after the dissolution. In the absence of notice, the result would be the same.

Can we open the Partnership firm again with the same name after the dissolution?

An outgoing partner may carry on a business competing with that of the firm, and he may advertise such business, but subject, to contract to the contrary, he may not
(a) use the firm-name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

what is the difference between “Dissolution of partnership” and “dissolution of partnership firm”?

There are two concepts dissolution of partnership and partnership firm Dissolution of partnerships means the end of the partnership business, whereas, dissolution of partnership firm indicates the termination of the partnership among the partners and the firm.
Suppose, if a current partner expires, retires, and is unable to settle the debt then rest of the partners can buy the share percentage of the departing partner and resume the operation of the firm under the same title.

Who is responsible after dissolution?

Although the liabilities of the partners cease to exist once the dissolution of the firm takes place, the partners are liable for any act/occurrence prior to the dissolution of the firm. Only partners who are incapacitated/adjudicated as insolvent/dead are exempt from the liability.
Suppose, if a current partner expires, retires, and is unable to settle the debt then rest of the partners can buy the share percentage of the departing partner and resume the operation of the firm under the same title.

What are the consequences if I will not dissolve the partnership firm even if not carrying any business or trade?

The partners of a firm are liable to a third party for any act done by any of them unless they give public notice of the dissolution. Any partner can give this notice.
Section 47 states that even after the dissolution of the firm the authority of each partner to bind the firm, and the mutual rights and obligation will continue notwithstanding the dissolution, as it may be necessary to wind up the business. This clause can further be related when the assessing officer, assess the firm for their tax liability.

After dissolution, my partner of the said firm has commenced a similar business with the same name. Can I restrain that partner from carrying on the said business?

After a partnership firm is dissolved, in the absence of a contract between the partners, restrain any other partner from carrying on a similar business in the firm-name or from using any of the property of the firm for his own benefit, until the dissolution of the firm has been fully wound up. If any partner or his representative has brought the goodwill of the firm, nothing shall affect his right to use the firm-name.