What is the difference between dissolution of partnership and dissolution of firm?

Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be:

• Admission of a partner
• Death of a partner
• Retirement of a partner
• Dissolution of firm

In the event of the above cases, the existing partnership is dissolved and a new partnership is created with the new partners without affecting the firm.

A new partnership deed is created, in case there is a partnership deed agreed among partners and new profit-sharing ratios among the partners are decided, while the assets and liabilities of the firm remain the same.

Dissolution of a firm means the firm no longer exists. Various reasons for the dissolution of a partnership firm could be:

• Mutual decision of partners
• By the court of law

A partnership firm is dissolved by a court of law when there has been a non-compliance of law, the firm is engaged in illegal practices, or that the court’s opinion is that it is in the public interest for the firm to be dissolved.

The partnership is also dissolved with the dissolution of the firm but the converse need not be true.

When a firm is dissolved, there is a sequence that is followed to pay creditors and partners.

• First, outside creditors like banks, third party creditors are paid firstly with the cash available with the firm and then by selling the assets.
• Second, partners who have lent money in the form of a loan to the firm are paid.
• Lastly, if there is any surplus, partners are paid with the amount of their capital. In case of loss, partners are required to pay from their personal assets.

Dissolution of the firm can be done by the partners themselves and they could also appoint a third person to do so on the payment of fees, charges, the proportion of surplus, or any contract that has been agreed to.

To summarize, we can a draw a difference table as follows: