What is the correct order of payment of liabilities for a dissolved general partnership?

The correct order of payment of liabilities for a dissolved general partnership is based on established legal principles of partnership law, which dictates the priority in which debts and obligations must be settled.

In the case of a dissolution, the partnership's assets are first used to pay off debts owed to external creditors who are not partners. This is primarily because partners typically have a vested interest in the business and the repayment of outsider claims is prioritized to protect third-party interests. Once all obligations to these outside creditors are satisfied, any remaining assets can be allocated to the partners.

Next, the partners are entitled to receive payments in respect of their capital contributions to the partnership. Capital contributions refer to the initial investments made by the partners in the business and are treated distinctly from profits or other claims they might have against the partnership. Services provided by partners or any profits owed are typically settled after capital contributions have been addressed.

This order adheres to the general principles of equity and the recognition that external creditors must be compensated before any distributions are made to partners, ensuring that the partnership honors its obligations to those outside the organization before resolving any internal claims.