US: Partnership Liquidation

Partnership Liquidation

1. How does partnership liquidation differ from partnership dissolution?

Dissolution of a partnership terminates the partnership as a legal entity, but the partnership business may continue under a new agreement. When a partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity. Thus, a partnership may be dissolved without liquidation, but it may not be liquidated without dissolution.


2. What is simple partnership liquidation, and how are distributions to partners computed?

A simple partnership liquidation is the liquidation of a solvent partnership in which all partners have equity capital and all gains and losses are realized and recognized before any distributions are made to the partners. In simple partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances.


3. UPA specifies a priority ranking for distribution of partnership assets in liquidation. What is the ranking?

The priority ranking for the distribution of assets in liquidation pursuant to UPA is:

Rank I   Amounts owed to creditors other than partners and amounts owed to partners other than for capital and profits
Rank II  Amounts due to partners after all assets have been liquidated and liabilities paid.


4. What is the right of offset rule? How does it affect the amount to be distributed to partners in liquidation?

Normally if a partner has loaned money to the partnership, those liabilities are repaid before any capital distributions. However if a partner is owed money and they have a debit (negative) capital balance, the liability is deducted from the capital shortfall, rather than be distributed.


5. What assumptions are made in determining the amount of distributions (or safe payments) to individual partners prior to the recognition of all gains and losses on liquidation?

The assumptions for determining distributions to partners prior to recognition of all gains and losses on liquidation are (1) all partners are personally bankrupt such that no partner could contribute personal assets into the partnership and (2) all noncash assets are possible losses and should be considered actual losses for purposes of determining amounts to be distributed. In addition, liquidation expenses and probable loss contingencies should be estimated and assumed to be actual losses for purposes of determining advance distributions.


6. What are partner equities? Why are partner equities rather than partner capital balances used in the preparation of safe payments schedules?

Capital balances represent one factor in determining a partner’s equity, but loans and advances payable to and receivable from the partnership are factors that must also be considered in calculating safe payments. Partner equities, rather than capital balances, are used in safe payment schedules in order to avoid making distributions to partners that may end up with debit capital balances; i.e., owing money to the partnership.


7. How do safe payments computations affect partnership ledger account balances?

Safe payment computations per se do not affect ledger account balances. Actual cash distributions based on safe payments computations do reduce partnership assets and equities and require recognition in ledger accounts.


8. What is a statement of partnership liquidation, and how is the statement helpful to partners and other parties involved in partnership liquidation?

A statement of partnership liquidation is a summary of transactions and balances for a partnership during its liquidation stage. Such statements provide continuous records of liquidation events. Interim liquidation statements are particularly helpful in showing the progress that has been made toward liquidation to date and in identifying remaining assets to be liquidated and liabilities to be paid. Interim liquidation statements are helpful to partners and creditors in providing a basis for current decisions as well as future planning. Liquidation statements are important legal documents for partnership liquidations that come under the jurisdiction of a court.


9. A partnership in liquidation has satisfied all of its nonpartner liabilities and has cash available for distribution to partners. Under what circumstances would it be permissible to divide available cash in the profit- and loss-sharing ratios of the partners?

Available cash may be distributed to partners according to their profit and loss sharing ratios only when nonpartner liabilities have been satisfied and partner equities (capital and loan balances combined) are aligned with the relative profit and loss sharing ratios of the partners. In the absence of loans or advances payable to or receivables from individual partners, cash can be distributed to partners in their profit and loss sharing ratios when capital balances are in the relative profit and loss sharing ratios of the partners and all nonpartner liabilities have been paid.


10. What are vulnerability ranks? How are they used in the preparation of cash distribution plans for partnership liquidations?

Vulnerability ranks are an ordering of partners on the basis of the adequacy of their equities in the partnership to absorb possible partnership losses. The ordering is typically from the most vulnerable to the least vulnerable. Vulnerability ranks are used in the preparation of assumed loss absorption schedules, which, in turn, are used in the construction of cash distribution plans.


11. If a partnership is insolvent, how is the amount of cash distributed to individual partners determined?

Partnership insolvency occurs when partnership liabilities exceed partnership assets. In this case, all available cash is distributed to partnership creditors. Individual partners will be called upon to use their personal assets to satisfy the remaining claims of the partnership creditors.


12. When all partnership assets have been distributed in the liquidation of a partnership, some partners may have debit capital balances and others may have credit capital balances. How are such balances eliminated if the partners with debit balances are personally solvent? What if they are personally insolvent?

Partners with credit capital balances after all partnership assets have been distributed in liquidation have a claim against partners with debit capital balances. If the partners with debit balances are personally solvent, they should pay amounts equal to their debit balances into the partnership so that partners with credit balances can receive their partnership claims in full. If partners with debit capital balances are insolvent, the partners with credit balances will absorb the losses of the insolvent partners with debit capital balances in relation to their relative profit and loss sharing ratios.