A partnership is a kind of business where two or more people come into a formal agreement to run a firm and agree to be the co-partners by assenting to distribute duties and obligations and share the income, profits, or losses that the business produces as per their ratio. Sometimes a situation arises where the partners of the partnership firm decide to put an end to such either on their own or due to some external force, and this process is known as the dissolution of the partnership firm.

Now, from a legal point of view, the partnership firm is not a separate legal entity which means that partners and their businesses are not separate from each other. Hence, when the situation of dissolution arises, the settlement can take place with the help of a partnership dissolution agreement or deed. This blog will help you in understanding the meaning and inclusions in the partnership dissolution agreement.

What is the dissolution of a partnership?

Dissolution of partnership means termination of every contractual relationship between the partners and all the operations that are performed in a company are suspended along with disposing of all the assets and liabilities. There is a difference between the dissolution of the partnership and the dissolution of the partnership firm.

The former means the end of the partnership business and the latter means the termination of the partnership along with the firm. Section 39 of the Indian Partnership Act, 1932 defines the dissolution of the firm, it states that when the dissolution of partnership between all the partners of the firm occurs, this is called dissolution of the firm. This blog will specifically analyze the dissolution of a partnership and not of the partnership firm.

A partnership can be dissolved for different reasons like the introduction of a new partner or the death or the retirement of the previous one, and so forth and the rest of the partners can continue their business. When this situation occurs i.e. change in partners happens, this leads to the end of an earlier partnership deed and as a result, a new partnership is formed with the previous liability and assets.

A partnership may be dissolved because of the following reasons:

• Due to the death of the partner.
• Due to the admission of a new partner.
• Due to the retirement of a partner.
• Due to the bankruptcy of a partner.
• Due to the expiry of the partnership period, if the partnership is for a particular period.

What is a partnership dissolution agreement?

A Partnership Dissolution Agreement is a legal document used by two or more partners who are in a partnership business together to end the partnership. This Agreement sets out the plan for settling the partnerships’ obligations and debts, distributing the partnership’s assets to the partners, and completing the inventory of the partnership’s holdings. 

When a partnership is dissolved formally, the partners can ensure that they are no longer individually liable for the partnership’s debts and a partner cannot bind the other partner to any business deal without being acknowledged by the remaining partner or agreement. This partnership dissolution agreement format can be particularly useful if no partnership agreement has been formed between the partners or if the existing partnership agreement did not provide terms and conditions for terminating the partnership.

This partnership dissolution agreement format simplifies the complex process of ending the business relationship by creating a precise timeline, delineating the roles and responsibilities of each partner, explaining the division of the partnership assets in detail, and allowing the partners to move on from the partnership.

What is the purpose of the Partnership Dissolution Agreement format?

Apart from dissolving a partnership legally, the partnership dissolution agreement format is formed to serve the following purposes:

• To avoid misunderstandings between partners.
• To settle down the existing obligations of the business.
• For repaying the liabilities, if any.
• To create a concrete plan for the distribution of assets among the partners.

What are the elements included in the partnership dissolution agreement?

Creating a partnership dissolution agreement format is the first step toward forming a concrete plan for the winding down of the partnership. This agreement contains the following essential elements:

1. Description of the partnership name 

The legal name under which the partnership has been doing business must be included in the partnership dissolution agreement format. For example, the name and style of the partnership can be written.

2. Purpose of the Partnership 

You can give a brief description of the nature of the business and the purpose behind conducting the partnership business. For example, you can briefly describe your real-estate business or manufacturing business.

3. Partner information along with the date of commencement of partnership 

In this, give the legal names and addresses of all current partners involved in the partnership and details about their management roles if any. Also, mention the date when the partnership between partners has been commenced.

4. Date of the formation of the partnership dissolution agreement

Mention the date when this partnership dissolution agreement format has been made and the partners under this agreement have mutually agreed to dissolve the partnership.

5. Plan for dissolution

In this, the information about when and how the partnership will be dissolved can be included, along with the description of any paperwork that will be filed with the relevant state agencies, such as the Secretary of State’s office or state Department of the Treasury. For example, intimation of the fact of dissolution to the Registrar of Firms under Section 63 of the Act and advertisement in the local official gazette under Section 45 of the Act.

6. Liquidation plan

In this section, you can outline the methods by which the partnership’s assets will be liquidated, including the appointment of a Partner in charge of collecting and selling the assets and distributing any remaining assets of the Partnership to the Partners and the selection of an accountant to create a Statement of Account for the Partnership. 

7. Division of assets and liabilities

A full and general account and balance sheet shall be made of the property, assets, and liabilities of the partnership. Also, valuation of machinery, plans, tools, utensils, stock-in-hand, office equipment, and materials should be done, so that they can be divided between the partners in the ratio fixed in the agreement.

Important points to be kept in mind while drafting a partnership dissolution agreement format

• When winding up shows the loss or the assets of the partnership are insufficient to meet the liabilities and debts of the partnership, then it is the duty of the partners to pay such losses in the proportion of their contribution to the capital.
• Once the dissolution agreement has been completed, all the partners should sign and date the Agreement, along with keeping the copies for their record. The signing of the agreement should be done in the presence of two or more witnesses.
• This signing of the partnership dissolution agreement format does not automatically terminate the partnership because the partnership will continue until the business has finished the process of distributing the remaining assets, settling debts, and terminating the legal existence of the business as described by the agreement. When all the necessary steps have been completed, the Partnership will be officially dissolved and the Partners will no longer be personally liable for any of the Partnership’s obligations.
• This partnership dissolution agreement format can also be executed by the representatives of the partner.
• The cost of liquidation proceedings should also be considered as a liability of the partnership and paid from the funds of the partnership.

The applicable law for the dissolution of the Partnership

The dissolving of a Partnership is a matter of state law, with different states having different requirements to legally end a Partnership. Some states required a document, known as a Statement of Dissolution, to be completed by the Partnership and filed with the relevant state agency. Other states require that the Partnership publish notice of the dissolution of the Partnership in a local newspaper in every county in the state where they did business. State law should be conferred to be sure that the Partnership completes all of the steps necessary to dissolve the Partnership in the state where they are doing business.

Conclusion

It can be concluded that when the partnership is dissolved, there are certain rights and responsibilities between the partners that they need to fulfill and one can claim it with the help of the Indian Partnership Act, 1932 as it gives certain provisions regarding the same. This act provides grounds for the dissolution of the partnership so that nobody can take advantage of the same and it also helps to maintain a good environment in the firm. If you want to know more about what to include in a partnership dissolution agreement, contact eSahayak.