In the dissolution of a partnership, which of the following is the correct order of settling the claims of creditors and partners?

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In the dissolution of a partnership, which of the following is the correct order of settling the claims of creditors and partners?

  1. Pay off partners’ loans, then settle external creditors, and finally distribute remaining assets to partners.
  2. Settle external creditors first, then pay off partners’ loans, and finally distribute remaining assets to partners. ✓
  3. Distribute remaining assets to partners first, then pay off partners’ loans, and finally settle external creditors.
  4. Pay off external creditors and partners’ loans simultaneously, then distribute remaining assets to partners.

Explanation

The legal order of payment during dissolution is: 1) External creditors, 2) Partners’ loans, 3) Partners’ capital. Outside creditors must be paid first to protect third parties.

Partners’ loans rank higher than capital because they’re debts, not ownership. Capital is only distributed if money remains after all debts are settled.

Remember: Outsiders first, insider loans second, ownership last. Protects people who trusted the partnership.

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