When a person enters a business partnership, sometimes between friends or family members, we may have high expectations that the business will be a success. Occasionally, however, things go awry, and business partners cannot agree on how to operate the business because there is difficulty in finding unanimity among members in the decision-making process.
When this occurs, it may be necessary to dissolve the partnership as expeditiously as possible. It is critical to follow the legal rules when exiting a business partnership to reduce or eliminate the risk of potential future legal liability.
Exiting a business partnership entails formalities that differ from exiting a corporation or limited liability company. An individual that desires to safeguard their legal rights should familiarize oneself with the Uniform Partnership Act (UPA), which has mostly been adopted in every state to provide governance for business partnerships. The purpose of the Uniform Partnership Act is to set forth rules for instances in which the partnership did not create their own articles of partnership. The UPA has been adopted in most states and sets forth rules surrounding common ownership interests, profit and/or loss sharing, and details shared management responsibilities. There are also rules that speak to governance if a partner desires to exit the partnership.
It is generally advised to exit a partnership graciously. Obtaining the consent of all other partners will greatly reduce the risk of a lawsuit by the remaining partners. It is advisable to be reasonable and agreeable to settling all outstanding issues that need to be resolved. When all parties have reached satisfactory terms and the company ceases to operate, the partnership is terminated, and a new partnership will need to be formed by the remaining partners.
The dissolution of the partnership must be communicated to all partners and their respective stakeholders. A person may choose to either deliver a written notice of the plan to dissolve using certified mail or publish a printed notice in a local newspaper.
Below are the steps a person will need to take in dissolving a partnership.
A partnership can be dissolved by any partner. However, understanding the fine print of the current partnership agreement is imperative before preparing the paperwork needed for the dissolution of a partnership.
Before you start drafting all the documents necessary to dissolve the partnership, you should consider what you are prepared to compromise on and what you are willing to accept to exit this partnership.
If the partners plan on continuing the business after you leave, you should make sure the separation agreement will protect you from any potential lawsuits if you intend to remain out of the business. You need to make sure the separation agreement protects you against third party lawsuits.
For instance, if your name is on contracts that will continue after you leave, the agreement should state who is liable for any future breaches.
Remember that the business dissolution process depends on what kind of business or partnership entity the company is affiliated with and the terms of the business agreement at the time of dissolution.
The remaining partners can work together to reach a binding agreement if they do not have a partnership agreement providing a definitive exit or termination strategy. Does your business have a partnership agreement that provides for this exit or termination strategy? You may also seek a professional mediator or attorney’s help.
If the members of the partnership cannot agree, the court may order a division of assets and obligations, which will likely be outlined in the partnership agreement.
The buyout price may also be based on the liquidation value of the partnership or the dissolution of the business. The price may include the value of your small business insurance policies, too.
Buyout agreements can be used to provide all parties involved with a solution if there is an irreconcilable conflict between partners, especially if the business is still in operation. You should establish a realistic timeline for accomplishing each of these tasks in your separation agreement.
Great dissolution agreements for partnerships will address several important issues. These include:
To strengthen and formalize a partnership agreement, it is advisable to use a qualified business attorney to draft the official documents for partnership dissolutions. Each state has distinct requirements you should be aware of.
The most important step to dissolving a partnership is to file a certificate of dissolution with your Secretary of State or the state agency your business registered with. Taxes, including local taxes, are to be filed and payment made, besides all relevant tax returns.
Talk with all your creditors and give them a deadline by which they may submit claims for the outstanding amounts. Your company then settles any outstanding debts or contests debt claims with the help of a lawyer if needed.
When a partnership ends, it is vital to pay the partners' debts and close their bank and credit accounts. After the partnership has ended, all open accounts and credit cards should be closed.
If the partnership business will be managed by one partner, they will be responsible for opening new accounts in their own name as well. Closing the accounts can be addressed in the dissolution agreement.
A significant step in the right direction is to pay your final income taxes. The Internal Revenue Service (IRS) has established guidelines on when partnerships will end.
The IRS expressly states that all business activities are to cease, and none of the partners may engage in any ongoing business or financial ventures on behalf of the partnership.
The second guideline is met when at least 50 percent of the equity in the business is acquired or exchanged within a one-year period, or 12 months.
If you are currently considering or planning to dissolve a partnership, you must inform your customers, suppliers, advisors, and other community members. Take the time to notify everyone that the company has been sold, has a new owner, or has closed for business permanently.
Never lose sight of the customers' needs, even in the middle of a contentious business dispute. If your partnership had employees, you would have to pay their salaries. In many cases, these agreements will be based on the contracts of your employees.
There is the option to terminate or make redundant employees if they have received adequate compensation equivalent to their notice period.
The IRS must also be notified of the termination of a partnership. Otherwise, it will be considered continuing in operation and taxes will be due. Therefore, it is critical to notify any local, state, and federal tax authorities of the intent to dissolve a partnership.
Changes to ownership are not that easy, so do not make the mistake of thinking that you can do them without doing anything with the state. Make sure you are protected in dissolving a partnership and happy with the terms of the contract.
Vhanessa Hair writes and researches for the legal and insurance education site, FreeAdvice.com.