MBE Rules · Business Associations
Dissolution and Winding Up
Cal. Corp. Code §§ 16801-16807
The rule
On dissolution, assets are applied first to creditors (including partner-creditors), then to capital contributions, then profits; partners share losses as they share profits absent contrary agreement.
In plain English
When a business is dissolved, its assets are used to pay off creditors first, which includes any partners who are also creditors. After settling debts, any remaining assets are distributed to partners based on their capital contributions, and finally, any profits are shared among partners. Losses are shared in the same way profits are, unless there is an agreement stating otherwise.
Worked example
A partnership has $100,000 in assets and $70,000 in debts. After paying off the creditors, $30,000 remains. The partners had each contributed $10,000 in capital, so they each receive their contributions back, and the remaining $10,000 is split as profit. Thus, each partner ends up with their original investment plus a share of the profits.
Memory hook
Dissolve, pay debts, return capital, share profits!
The trap
Exams often include scenarios where students must determine the order of asset distribution, which can confuse them if they overlook the priority of creditor payments.
How examiners test it
Questions typically present a fact pattern involving a partnership's dissolution and require candidates to analyze the distribution of assets among partners and creditors.
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