If you don't correctly and completely dissolve your partnership, you could face liability long after your business closes its doors. Even when all partners agree to end the partnership, there are still numerous legal issues that must be addressed, from terminating contracts to distributing assets. Disagreements between partners can make the process even more challenging.
In either case, understanding how to dissolve a partnership is imperative to getting it done right and avoiding unnecessary legal headaches. This article will help you get started on the right path; however, it is always a good idea to work with an experienced business attorney who can guide you through the process.
How to Dissolve a Partnership
Partners may want to dissolve their partnership for a variety of reasons. Examples include disagreements between partners over finances or strategy, as well as the death, incapacity, or retirement of a partner. Sometimes, partners may simply be ready to move on to new ventures.
While every partnership situation is different, dissolution generally involves the following steps:
- Review your partnership agreement: Ideally, you and your partner(s) have a partnership agreement and/or operating agreement that outlines when the partnership can be dissolved and the process for doing so. Such provisions may address what situations trigger a dissolution or buy-out, how to value partnership interests, and the rights and obligations of the partners during the dissolution process. Accordingly, if you have a partnership agreement, the first step is to review your partnership agreement to determine what steps must be taken to end the partnership.
- Meet with your partners: Communication is essential to dissolving a partnership amicably. Once you have decided it's time to dissolve your partnership, you should notify your partner(s) and begin discussing how each of you expects the process to unfold. For instance. will the business close entirely or does one of the partners want to continue the business by buying the others out?
- Draft a dissolution agreement: Even if you already have a partnership agreement in place, it is often advisable to execute a separate dissolution agreement that precisely defines the terms of the partnership termination. Important issues to address include whether the business will continue, the allocation of profits and losses, the rights and responsibilities of the partners going forward, and the payment, closing, and/or assignment of accounts.
- Wind down your business: Upon dissolution, partnerships often have significant tangible and intangible assets, including inventory, equipment, and intellectual property, that must be distributed or sold. Partnerships must also terminate all existing contracts and resolve any outstanding financial liabilities. Once all debts are paid, any outstanding funds must be dispersed to the partners.
- Notify clients, customers, and suppliers: To preserve your business relationships, it is important to promptly notify clients, customers, suppliers, and others about your partnership dissolution. You may also need to negotiate how you plan to fulfill existing contractual obligations and/or terminate existing contracts. Some states also require the publication of a notice of dissolution in the newspaper.
- File any necessary paperwork: Some jurisdictions require partnerships to file certain paperwork to legally close their business, so it's important to check your state laws. When dissolving a business, you may also need to file income, employment, and sales tax returns with the appropriate tax authorities.
Can One Partner Dissolve a Partnership?
We are often asked, "Can one partner dissolve a partnership?" Generally speaking, one partner can end a business partnership. As in other cases, the dissolution is governed by the terms of the partnership agreement or operating agreement. For example, your partnership agreement may contain a buy-sell provision that allows you to exit the partnership by selling your interest to your partner(s). It may also include provisions outlining when one partner (generally a partner holding a majority interest) can unilaterally decide to dissolve the partnership.
In the absence of an agreement addressing whether one partner can dissolve the partnership, state law controls. For instance, both New York and New Jersey have laws in place that authorize judicial dissolution. Under the New Jersey Uniform Partnership Act, any partner (even if there is no partnership agreement) to file an application in the courts to dissolve the partnership. Given the complex legal issues involved and the risk of protracted litigation, it is advisable to work with an experienced partnership lawyer who can protect your interest.
Work With Knowledgeable Partnership Attorneys
Partnership dissolution can be a complex and time-consuming process. Our partnership attorneys understand how to dissolve a partnership properly, while also shielding our clients from liability and preserving their assets. When faced with a partnership dispute, we can also help clients reach an amicable solution that allows both sides to move forward.
The attorneys of Scarinci Hollenbeck's Partnerships Practice Group provide experienced counsel to New York and New Jersey partnerships of all sizes in a wide variety of industries. Whether you are looking to form, grow, or dissolve your partnership, our team develops a comprehensive strategy that advances both your business and legal interests.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.