What is the process to close a partnership firm?
I want to close a Partnership firm. What is the process for the same? We are two partners in this firm both 50%-50%. A partner invested the money - Rs. 5,00,000 and the other partner invested hard work (tajurba).
Please tell me if we can legally divide the money the firm gets after closure at 50-50. How much time does it take for the closure process?
As per our understanding one partner can be the investor and the other partner can be working or can be a business bringing partner and hence is not required to invest capital.
This combination is usually made for bringing together funds and experience to earn profit and share it according to the Partnership deed. At the time of dissolution as per our understanding, the working partner can take home his share of profit and cannot ask share in the capital of other partner. It is also important to mention here that all clauses mentioned in Partnership deed are very important before taking any decision.
Dissolution (closure) of a firm can take place in one Month and the procedure for the same is as follows:
1) In the processor of dissolution, the following accounts are opened in order to close the books. Accounts in the firm are settled as per the rule of Indian Partnership Act 1932:
a) Realization Account
b) Partner's loan account
c) Partner's Capital account
d) Cash or book account
2) In settling the accounts of a firm after dissolution, the following rules shall subject to agreement by the partners be observed-
A - Losses including deficiencies of capital shall be paid first out of profits, next out of capital and lastly if necessary by the partners individually in the proportions in which they were entitled to share profits.
B - The assets of the firm including any sums contributed by the partners to make up deficiencies of capital shall be applied in the following manner and order:
a) In paying the debts of the firm to the third parties,
b) In paying to each partners rateably what is due to him from the firm for advance as distinguished from capital,
c) In paying to each partner rateably what is due to him on account of capital and
d) The residue if any shall be divided among the partners in the proportions in which they were entitled to share the profit.
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