Dissolution of Partnership

Question 1

How does a partnership dissolve? (three steps)

Answer 1

1. DISSOLUTION: A general partnership will dissolve upon any material change in partnership caused by death or withdrawal or any single general partner
2. WINDING UP: period between dissolution and termination in which the remaining partners liquidate assets to satisfy the partnership’s creditors.
3. . TERMINATION: the real end of a partnership

Question 2

What is the liability of the partnership during the wind up phase?

Answer 2

OLD BUSINESS: the partners are liable for all transactions entered into in order wind up old business (e.g. paying off creditors)
NEW BUSINESS: individual general partners still retain liability on brand new business transactions unless notice of dissolution given to all creditors (actual and potential)

Question 3

What is the priority of distribution when “winding up” a partnership?

Answer 3

FIRST: outside creditors must be paid
-All non-partner, third party trade creditors must be paid first
SECOND: inside creditors must be paid
-Partners/insiders who have loaned the partnership money)
THIRD: partner capital contributions must be paid
-The partnership is liable to its own partners for full payment of its capital contributions)
-If there is not enough assets, partners have to contribute equally for any deficit
FOUTH: net profits (profits – losses), if any
-absent an agreement profits/surplus are shared equally among partners