Liquidation of a partnership can be define as the winding up of its business activities characterizaed by sale of all non-cash assets, settlement of all liabilities and distribution of the remaining cash to the partners. It is usually done when the business entity will not continue its activities after the dissolution of the partnership. Maybe the partners already fulfilled their business purpose or the partnership is in financial difficulties, that’s why they decided to liquidate it. The purpose of this paper is to inform the reader on the methods and order of the preferences of partnership liquidation. Also it discuss particularly the steps on performing liquidation and the order of the preferences that it should follow. The main part of the body is divided into two areas: 1) Definition of partnership liquidation and order of preference; 2) Methods of partnership liquidation and their processes.
The liquidation of the partnership is the winding up of its business activities characterized by sale of all non cash assets, settlement of all liabilities and distribution of the remaining cash to the partners. The conversion of non-cash assets into cash is reffered to as realization. This may result to a gain or loss on realization and shall be divided in the profit or loss ratio of the partners. In some cases, a substantial loss on realization may yield for a partner a capital deficiency, which is the excess of a partner’s share in losses overthe partner’s capital credit balance. This deficiency will certainly affect the partner’s interest in the partnership. The liquidation of a partnership occurs after dissolution due to partnership fulfilling its purpose, partners desire to not continue the business, or partnership is in financial difficulty. It may voluntary or involuntary. Voluntary if the partners choose to liquidate the business and involuntary when the creditors force the partnership to liquidate. Order of Preferences
The assets of a general partnership shall be applied in the following order: 1.
First, those owing to outside creditors,
Second, those owing to inside creditors in the form of loans or advances for business expenses by the partners, 3.
Third, those owing to the partners with respect to their capital contributions, 4.
Lastly, those owing to the partners with respect to their share of profits. The second preference above gives the partner with the loan account the option to exercise his right of offset. This privilage is the legal right of a partner to apply part or all of his loan account balance against his capital deficiency resulting from losses in the realization of the partnership assets. In cases when the partnership assets are insufficient to settle all outside liabilities, the partners should make additional contributions in the partnership. Any partner who contributed in excess of his share in this liability has a right to collect the supposed additional contributions from the other partners. Methods of Partnership Liquidation
The following methods maybe used when a partnership is liquidated: 1.
Under this method, all non-cash assets are realized and the related gains or losses distributed and all liabilities are paid before a single final cash distribution is made to the partners. 2.
Under this method, realization of non-cash assets is accomplished over an extended period of time. When cash is available, creditors may be partially or fully paid. Any excess may be distributed to the partners in accordance with a program of safe payments or a cash priority program. This process persists until all the non-cash assets are sold. Lump-sum Liquidation
Under this method, all non-cash assets are realized and all liabilities are settled before a single final cash distribution is made to the partners. The procedures below may be followed in lump-sum liquidation: 1.
Realization of non-cash assets and distribution of...
References: East Bajac-Bajac, Olongapo City
March __, 2011
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