PAMANTASAN NG LUNGSOD NG PASIG

ALKALDE JOSE ST., KAPASIGAN, PASIG CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

LIBRARY RESEARCH

In Partial Fulfillment of the Requirements

In English 102
(Writing in the Discipline)

KAREN MAY WILLIAMS LUSUNG

BSA-2A

PROF VANESSA CASTIYO-LAGO

Subject Instructor

September 30, 2014

The Causes of Dissolution of Business Entities and

its Effect to the Society and its Economy

Dissolution Greatly Affects the Society and its

Economy

THE CAUSES OF DISSOLUTION OF BUSINESS ENTITIES AND ITS EFFECT TO

THE SOCIETY AND ITS ECONOMY

DISSOLUTION GREATLY AFFECTS THE SOCIETY AND ITS ECONOMY

RESEARCH QUESTIONS

This research aims to answer the following questions:

1. What are the causes of Dissolution?
2. What are the possible outcomes or effects of Dissolution to the society and
economy?

TABLE OF CONTENTS

Title Page

Thesis statement

Research Questions 3
Definition of Terms 5
Introduction

Outline of the body 7

Body

8-14

Conclusion

15

References

16

DEFINITION OF TERMS

Accounts Payable- refers to debts that must be paid off within a given period of time in
order to avoid default.
Asset- is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

Bonus-it is the amount of capital or equity transferred by one partner to another partner.
Capital - wealth in the form of money or other assets owned by a person or
organization or available or contributed for a particular purpose such as starting a
company or investing.
Creditor- An entity (person or institution) that extends credit by giving another entity
permission to borrow money if it is paid back at a later date.
Dissolution- means the discontinuance of the legal relationship between all the
partners of the firm.
Equity interest- it refers to the partial or full ownership in a company by shares of
stock, rather than a creditors interest from being owed money.
Fair value-refers to an estimate of a security's worth on the open market.
Incorporation- refers to the process of legally declaring a corporate entity as separate
from its owners.
Investors- An individual who commits money to investment products with the
expectation of financial return.
Liability- In financial accounting, it is defined as an obligation of an entity arising
from past transactions or events, the settlement of which may result in the transfer or
use of assets, provision of services or other yielding of economic benefits in the future.
Profit- refers to the financial benefit that is realized when the amount of revenue gained
from a business activity exceeds the expenses, costs and taxes needed to sustain the
activity.
INTRODUCTION
5

In the Business cycle of the partnership firms, Dissolution is one of the factors
that cant be hindered due to the partnerships limited life affected by natural-occurring
instances such as the death of a partner, Admission of a new partner with an objective
of expanding the business or any which can highly benefit the entity, retirement of a
partner, Incorporation of the partnership and mutual agreement among them to ensure
the life of the entity. Dissolution refers to the change in membership which is also
caused by the operation of the law such that whenever the partnership firm showed
subsequent illegality in its operation it will be subject for Dissolution by the government
as well as the court (Mathur, 2010)

In these research, one proposes that changes in the ownership of a business

firm may have many effects not only to the business itself but also to the society
specifically to the government employees of the firm, public, creditors & investors and
customers who extended credit to the partnership before dissolution that creates an
effect in our economy.

OUTLINE
6

I.

Dissolution

II.

Causes of Dissolution
A. By act of partners
1.
2.
3.
4.
5.

Mutual Agreement
Withdrawal or retirement of a partner
Death of a partner
Incorporation of the partnership
Admission of a partner

B. By operation of law
C. By court order
III.

Effects of Dissolution
A. To the business partners/firm
B. To the society
1. Customers, creditors & investors
2. Government & public
3. Employees of the firm
C. To the economy

BODY

I.

Dissolution
The Dissolution of the partnership refers to any change in the relation of the
partners resulting to the creation of a new business entity which can be
caused by any partner desisting from the partnership firm. As have said in
section 39 of the Indian Partnership Act, Dissolution means the

discontinuance of the legal relationship between all the partners of the firm
(Mathur, 2010).
A business entity may be dissolved without making it into an end however
liquidation is always preceded by dissolution. Dissolution is already a part of
the business cycle of a partnership entity which cannot be kept from occurring
because of the limited life of a partnership (W. Ballada & S. Ballada, 2014).
As Ballada have said, Dissolution of the partnership does not necessarily
imply that business operations will come to an end. Dissolution only pertains
to changes in the ownership and continues until all the partnership affairs are
settled due to the said changes (2014).
II.

Causes of Dissolution
A. By act of partners
1. Mutual Agreement, the partners of the business firm may set an
agreement supported by a contract about when will the partnership
end or be dissolved based on Section 40 of the Indian Partnership Act,
however this agreement can be disregarded if the business firm
violates a law or if there is any justifiable grounds that it must be
dissolved immediately even if the business does not yet cover up the
agreed operating period of the partners (Mathur, 2010)
2. Withdrawal or retirement of a partner, the partners may retire from a
partnership because of old age or incapability of a partner to fulfill their
duties, and to pursue for better opportunities. This type of Dissolution
may be accomplished by any of the following ways:

By selling his equity interest to one or more remaining

partners, where in the withdrawing partner is paid from the
personal assets of the buyer. The capital of the partnership will
not be affected because an existing business partner is the
one who purchased the interest.

By selling his equity interest to an outsider, similar in selling an

interest to a remaining partner and admission by purchase of
interest.
By selling his equity interest to the partnership, where in the

partner is paid from the assets of the partnership. The

withdrawing partner may receive an amount equal to, greater
than or less than the balance of his capital account, which
results to either bonus to the new or existing partner of the
entity.
3. Death of a partner, the deceased partner may be treated as a retired
partner such that he will receive the amount of his interest from the
business but instead his heirs will receive the said interest.
4. Incorporation of a partnership, the shares of the business are allocated
to the partners based on their capital interests. The firm adjusts and
closes entries, the assets and liabilities are transferred to the
corporation in exchange for shares of stock.
5. Admission of a partner, where in based on the principle delectus
personae, No one becomes a member of the partnership without the
consent of all the members. Such that a new partner can only be
admitted with the consent of all existing members of the partnership,
because partners are expected to develop mutual trust and confidence
among themselves to strengthen the life of the business. A newly
admitted partner is liable for all the obligations incurred before his
admission, even he/she has not yet taken part in the business when
such obligations were incurred. However, it could be disputed with an
agreement among partners. And a person may become a partner by
either of the following:

Purchase of an interest from one or more of the existing

partners, where in the payment is made personally from
whom the interest is obtained which results to transferring of
9

specific amounts among capital accounts. The payment

could be equal, less than or more than the purchasers equity
interest which can result to bonuses to old or new partners.

Investment of assets in the partnership by the new partner. A

person may be admitted by investing cash or other assets
into the partnership and not directly or personally given to
individual partners. This business transaction will result to an
increase in total assets and capital (Ballada, 2014)

B. By Operation of Law
It is said that the partnership that has done any subsequent illegal
phenomenon or activity which makes it unlawful for business will be
subject to dissolution immediately (Mann & Roberts, 2014).
C. By Court Order
The court is permitted by the government to dissolve a partnership when
a partner becomes insane, incompetent such that they are permanently
incapable of fulfilling his duties as a partner, also whereas when a partner
is guilty of misconduct or committing of an illegal activity which can highly
affect the name or image of the business entity.
A partnership can also be dissolved by the court when a partner transfers
his share or interest in the partnership to a third party as a form of
investment. As when the business is totally bankrupt such that the
business can no longer earn profit but can be run only at a loss. Also,
when the primary purpose of the business was no longer achieved and the
partners have no reliable connection with each other, it is very useless to
continue the operations of the business which will lead eventually to
dissolution (Mathur, 2010).
III.

Effects of Dissolution
A. To the business partners/firm
10

After the business entity has dissolved, there is a need to wind up all the
affairs of the firm. Such that all of the assets must be realized at fair value,
debts or obligations of the firm must be paid off and the excess of it should
be distributed among the partners to recognize their participation in the
business based on Section 46 of the Indian Partnership Act.
According to Section 50, when any of the partners earns any profit from
any transaction connected with the firm even after dissolution, he is
required to share the said profit with the other partners (Mathur, 2010).
B. To the Society
1. Customers, creditors and investors
Any 3rd party who extended credit to the partnership for investment or
lending loans to the partnership entity before Dissolution may hold the
partnership liable for any transaction such that the business entity may
have either legal or constructive obligation towards creditors, investors
and customers such that the legal obligation may arise when the entity
has binded to a contract which made legally enforceable. An example
of this obligation is the payment of accounts payable for goods and
services received from a creditor (Mann & Roberts, 2014).
While, Constructive obligations arise from normal business practice,
custom and a desire to maintain good business relations or act in an
equitable manner, according to Valix (2014).
A constructive obligation pertains to the liability of the business which
is not legally compelled to be settled. An example is that when one
customer has given a bad impression on the goods, products or any
services that the business has rendered, the entity may decide
whether or not to settle the argument between them and their
customers to maintain the good image of the business (C.A. Valix, C.
Valix & Peralta, 2014).
As mentioned earlier, investors and creditors who have extended credit
may hold the partnership liable such that those investors and creditors
11

will be paid off by the entity either by cash or non-cash assets

depending on the obligation that the entity has incurred (Mann &
Roberts, 2014).

2. Government and Public

Transaction of new business is prohibited until all the partnership
affairs are winded up such that the entity will be temporarily restricted
from operating which could highly decrease the governments
collection of taxes from the dissolved financial and private/public
partnership institutions which could highly affect the governments fund
for economic projects (De Leon, 2005).
3. Employees
When the business entity has been dissolved there is a tendency
where in it is not only the partners of the firm are replaced but also the
other employees of the firm because according to Ballada, the partners
and all the members of the firm should develop mutual trust and selfconfidence among themselves. And so, the new partner/s would
possibly get employees that he/she could trust in operating the
business (2014).
C. To the Economy
In Business, the main objective of an entrepreneur or businessman is to
earn profit not only for herself/himself but also to help boost the economic
growth of ones country. However, there are allot of natural causes which
negatively affects ones business that creates also an effect in ones
economy such that the economic growth greatly depends on the national
income and job employments of ones country.
For example, European countries such as Germany and France are facing
the need to adjust economic models in 2015 because as for Germany, he
12

needs to maintain its leading position in the manufacturing economy which

is heavily dependent on large employment rates and performance of big
businesses as well as France who is struggling sustainably to boost his
total exports however the challenge is in the businesses itself wherein
they should innovate and improve more to prevent dissolution. In this
scenario, it only means that the economic growth of one country is highly
dependent on its income that is contributed by its citizens. And so if one
business would be dissolved, the partners would not be able to earn for
profit.
It is like a domino effect where in if one entity cannot operate, it also
cannot generate profit that would affect the entire income of ones nation
because dissolution officially ends the future responsibility of the business
partners for handling taxes, debts, business operations and other
commitments (De Leon, 2005).

CONCLUSION

Partnerships operate under the concept of unlimited liability and unless otherwise
agreed upon by the partners, each one of them acts as manager and agent of the
13

partnership and consequently, their acts bind the partnership but also causes it to be
dissolved (De Leon, 2005).

One of the main purposes of a business is to grow. This can come in many forms
such as revenues, market share and community influences. It sounds easy enough but
its not, because of the underlying factors that can make this growth difficult. And these
factors are rapidly changing customers, softer market and fragile economic policies of
ones country.

Based on this research, one can conclude that dissolution mainly affects the
business entity and its partners, also the government and the economy are affected
since new business transactions are forbidden to operate until winding up is over, such
that it would disturb the flow of economic benefits not only to the business itself but also
to the government which creates a tremendous effect in uplifting the economy (De
Leon, 2005).

REFERENCES

1. Ballada, W.L. (2014). Partnership and Corporation Accounting.

2. De Leon. (2005). Comments and Cases on Partnership, Agency, and Trust.
14

3.
4.
5.
6.
7.

Mann, R. & Roberts, B. (2014). Business Law and Regulation of Business.

Mathur, S.B. (2010). Business Law.
Valix, C.T., Valix, C.A.M. & Peralta, J.F. (2014). Financial Accounting 1
Retrieved September 23,2014 from http://thelawdictionary.org/equity-interest/
Google. Retrieved September 20, 2014 from https://www.google.com.ph/?

gfe_rd=cr&ei=sNgYVOfZMcLEoAO02YGwBw#q=capital+definition
8. Investopedia. Retrieved September 24, 2014 from
http://www.investopedia.com/terms/i/incorporate.asp
9. Financial dictionary. Retrieved September 15, 2014 from
http://www.investinganswers.com/financial-dictionary/stock-valuation/fair-value995
10. Investopedia. Retrieved September 24, 2014 from
http://www.investopedia.com/terms/p/profit.asp
11. Investopedia. Retrieved September 15, 2014 from
http://www.investopedia.com/terms/c/creditor.asp
12. Investopedia. Retrieved September 15, 2014 from
http://www.investorwords.com/2630/investor.html
13. Investopedia. Retrieved September 15, 2014 from
http://www.investopedia.com/terms/a/accountspayable.asp
14. Hermes, E. Economic Outlook no.1208- 1209 / Growth: A giant with feet of clay
10 industry short stories expose Macroeconomic fragility
http://www.eulerhermes.com/mediacenter/Lists/mediacenterdocuments/Economic-Outlook-A-giant-with-feet-of-clay-Jul14.pdf

15