Definition: Partnership liquidation is the process of closing the partnership and distributing its assets. Many times partners choose to dissolve and liquidate their partnerships to start new ventures. Other times, partnerships go bankrupt and are forced to liquidate in order to pay off their creditors. Either way, the partnership liquidation process is similar.
What Does Partnership Liquidation Mean?
The partnership liquidation process starts with the partnership selling off all of its noncash assets at auction. Most of the time these assets will create a loss because they will be sold for less than what the partnership purchased them for, but some assets, like building, can appreciate and be sold at a gain. Both the losses and gains from these sales are allocated to the partners’ capital accounts based on the partnership agreement.
Next the partnership uses the cash it made from the sale of its assets and the remaining cash in its bank account to pay off all remaining liabilities. Sometimes partnerships will have enough cash to pay off their liabilities, but in bankruptcy situations partnerships most often don’t.
If there any assets remaining after all the liabilities are paid off, these assets are distributed to the partners based on their capital accounts. Once all the partnership has no remaining assets or liabilities, the partners can close the bank accounts and file dissolution papers with the applicable government agencies to legally dissolve the partnership.
If the proper paperwork isn’t filed with the state of organization, the partnership is still considered a legal entity even if the assets and liabilities have been distributed to the partners.