Many business partnerships eventually come to an end. Like other types of relationships, when business partners decide to split up, the process can be amicable or contentious. For personal and professional reasons, dissolving the partnership on good terms is in the best interest of all partners. A smooth split will prevent unnecessary conflict and legal expenses and allow the partners to enter their next venture without lingering obligations.
Dissolving a partnership is easier if there is a formal partnership agreement that spells out the exit strategy. If there is no partnership agreement, the partners will need to work together to negotiate the closing terms. Either way, partners should create a dissolution plan that clearly spells out the steps that must be taken in the separation. An attorney can draft a separation agreement and negotiate the details of a partner's exit, often through arbitration or mediation.
Why a Partnership Might Dissolve
An estimated 50 to 80 percent of business partnerships break up, according to The 5 Nonnegotiable Factors of Any Successful Partnership in Inc. The reasons for the dissolution of a partnership are as varied as the types of businesses that form partnerships.
A partnership may simply outlive its usefulness, and its partners may want to transition to a new legal entity, such as a corporation. Or, one of the partners may want to transition the business to a sole proprietorship by buying out the ownership interest of the other partners.
A partner may unilaterally choose to leave the partnership and start a new pursuit. The partners could also decide to end their working relationship because they have achieved their business goals, eliminating the need for the partnership. Alternatively, the business venture may simply not be working out, leading the partners to mutually agree that it should end.
In other cases, the partners may not be on the same page concerning career goals, working styles, values, commitment, company vision, or communication. To borrow a term from divorce law, such discrepancies may constitute “irreconcilable differences.”
Finally, certain circumstances may trigger the partnership's dissolution. These include a partner's death, incapacity, participation in illegal activities, or breach of the business agreement. The partnership could also dissolve if the partnership or a partner files for bankruptcy.
Checklist for Dissolving a Partnership
Regardless of the specific reason for dissolving a partnership, it is important to make a clean—and civil—break. Even if there is bad blood between the partners, they should try to reach an agreement outside of court. Partnership litigation not only is expensive but also may result in a division of assets and liabilities that satisfies no one.
The Separation Agreement
The partners ideally signed a partnership agreement when the partnership was formed that contained protocols for a dissolution. If this did not happen, all terms of the separation will need to be negotiated. With or without a partnership agreement, it is beneficial to put all of the terms of the dissolution in a separation agreement. This contract should cover the following key points:
- How to calculate the value of the partnership and its assets
- The amount of money each partner is owed for their share of the business
- The partnership assets each partner is entitled to
- How and when to remove the partners' names from assets, contracts, leases, etc.
- Indemnification and legal remedies
- Tax and debt obligations
- Enforcement mechanisms
- Documents to be filed
- Plans for notifying employees, customers, vendors, and other stakeholders
- A timeline for action items in the agreement
Steps Required to Dissolve a Partnership
Dissolving a partnership is not as simple as reaching an agreement. There are legal requirements that must be met and formal steps that must be taken before the dissolution takes effect.
State and Federal Requirements
Each state has different laws for dissolving a partnership. Typically, you must file articles of dissolution (known as a certificate of cancellation in some states) in the state where the partnership operates. You may be required to file additional forms (such as a transfer of property report) and pay any applicable termination fees as well. Note that the Internal Revenue Service has its own requirements for closing a business.
State laws may further require you to publish a public notice of your partnership's dissolution. This might not fully satisfy your notice requirements, however. Certain third parties may require written notification of the dissolution, for example, clients, customers, suppliers, creditors, and debtors.
Ending a partnership usually takes about ninety days from the time the paperwork is filed. That typically gives the partners enough time to wrap up remaining partnership dissolution matters, which may include the following:
- Canceling business permits, licenses, and registrations
- Closing banks accounts tied to the partnership
- Settling taxes and debts
- Examining contracts, leases, and other agreements and renegotiating them if necessary
- Liquidating and refinancing assets
- Distributing assets and paying agreed buyout amounts in accordance with the separation agreement
Failure to properly end a partnership may result in a number of future challenges. To avoid these risks, call our office and schedule a meeting with one of our experienced attorneys. We can help you craft a separation agreement that clearly articulates your desires.