What happens to partnership property when a partnership dissolves?

When a partnership dissolves, the correct course of action regarding partnership property is to liquidate it to pay off the partnership's debts before any distribution to the partners takes place. This process ensures that the obligations of the partnership are satisfied first.

Partnership property includes all property acquired for partnership purposes, and upon dissolution, there's a priority in the order of asset distribution: creditors are paid first from the liquidated assets. After all liabilities are settled, any remaining assets or proceeds can then be distributed among the partners according to the agreed-upon partnership arrangement, typically based on each partner's ownership interest or capital account balance.

For instance, if the partnership has incurred debts, those debts must be fully addressed before the partners can receive any portion of the remaining property. This principle upholds the integrity of the partnership's financial obligations and reflects the fiduciary duties partners owe to one another and to their creditors.