It is possible for a partner to dissolve a partnership firm at any time. The income of the partnership firm will be assessed as if no such dissolution or discontinuance had taken place when any business or profession carried on by the partnership firm has been discontinued or dissolved. Partnership firms dissolve by selling or disposing of all of their assets, settling their liabilities, and settling their accounts. This article examines Section 189 of the Income Tax Act, which deals with the dissolution of partnerships.
Overview
Tax, penalty, and other sums due are jointly and severally liable for every individual who was a partner of the firm at the time of the end, and the legal representatives of any deceased partner.
Dissolution Mode
The following methods can be used to dissolve or discontinue a partnership firm.
Agreement-based dissolution
Dissolving a partnership firm by mutual consent or agreement is the easiest and most hassle-free method. It is possible to dissolve a partnership with the consent of all partners or by a contract between the partners. Partnerships are formed by contracts and can be terminated by contracts as well. As stated in the Dissolution of Partnership Firm by Mutual Consent clause in the partnership agreement, all partners must agree to dissolve the partnership mutually.
By Notice of Dissolution
Whenever a partnership is at will, one partner may dissolve the partnership firm by notifying all the other partners in writing of the intention to dissolve the partnership firm. If you give a dissolution note, it cannot be rescinded without all the other partners’ consent. After proper notice has been given, any partner may initiate such a dissolution.
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In the event of a contingency, the company dissolves
Under certain conditions/clauses, a partnership firm may be dissolved under the terms of its contract:
- As a result of the expiration of a partnership period. There are some partnership forms that specify the duration of the partnership. Once the partnership period is over, these kinds of businesses will naturally end.
- Partnership firms may dissolve upon completion of one or more projects they were formed to undertake, i.e., when a project they were originally formed to undertake has been completed.
- As a result of the death of a partner.
- Insolvency is adjudicated by the adjudication of one or more partners as insolvent.
Dissolution by Compulsory Order
Partnership firms sometimes dissolve due to certain occurrences, making it difficult to continue their initial tenure. Compulsory dissolution of a partnership is possible as follows:
- The firm is adjudged insolvent if all its partners, or all its partners except one, are insolvent;
- When an incident has occurred which makes it illegal for the firm to continue to carry on its business because of some occurrence that has occurred.
Dissolution by Court
Partnership firms conduct their business by involving and working with a variety of individuals. There are situations in which one or more partners may not be eligible anymore under their circumstances, regardless of whether they are friends or relatives. Courts may also dissolve partnership firms in such cases. These are some of the reasons or ways in which a partnership firm may be dissolved by a court.
The partnership deed must be registered in order to dissolve through a court of law.
Due to Mental Instability
When one of the partners becomes mentally unstable/incapable, a partnership firm cannot function. A partner may be unable to handle the pressures of the job at hand due to mental instability. If such a situation arises, a partner or partners may file a court case to dissolve the partnership firm. Dissolution of a partnership may also result from the illness or incapacity of a partner for medical or other reasons. If a partner is not incapacitated or mentally unstable, they can file a court petition for dissolution of the partnership.
Due to Misconduct
Partner misconduct is the primary reason for dissolving a partnership firm by a court of law. If a partner or partners misbehave with other members of the firm or neglect to take into account the signed agreement that formed the partnership, they will be ousted by their partners.
After all the partners have signed a registered partnership agreement, it legally binds them all. A partner who disregards a particular clause, despite being warned multiple times, can be prosecuted in court. In such cases, the court can dissolve the partnership firm.
Equity transfer
In the event that another partner in the partnership has transferred their share of equity or interest in the firm to another individual without consulting the partners, a partner may choose to terminate the partnership.
Dissolution of responsibility
Once the partnership firm is declared dissolved, the partners’ liabilities cease, but they are still liable for any occurrences occurring before the dissolution. Following the dissolution of a partnership firm, only disabled/insolvent/dead partners should be exempt from this liability
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