Dissolving a Partnership

In legal terms, a partnership is an association of two or more persons acting as co-owners of a business for profit. This definition is provided under the model statute known as The Revised Uniform Partnership Act, or “RUPA.” Another way to put it is that partnerships form when two or more people or businesses combine their resources under a single name, in order to accomplish their business goals.

It does not matter whether the individuals involved were intentionally trying to create a partnership; it only matters that the parties intended to carry on as co-owners of a business for profit. This can be determined by whether they share in the profits, and whether they have a right to control the business.

An example of this would be if Person A and Person B open a coffee shop together. They split the profits and make joint decisions regarding the coffee shop. Although they do not refer to themselves as business partners, their relationship meets the above definition required to form a partnership.

Partnership laws govern the formation, operation, and termination of business partnerships. Unlike other business formations, such as corporations, partners generally share equally in the company’s profits, expenses, and losses. Partnerships are frequently used for smaller business efforts, although many major business activities are the result of partnership agreements. It is important to note that although there are no other legal formalities that must be met in order to create a partnership, nearly all partnerships have a partnership agreement.

How Are Partnerships Dissolved?

In some cases, a partnership may need to be dissolved or terminated for various reasons. Partnership termination refers to the way in which a business partnership is legally ended. A partnership will generally terminate in a “natural” way, such as when the business goal of the partnership has been achieved. Alternatively, a partnership may terminate prematurely due to unexpected circumstances. An example of this would be the death of a partner, or an illegal violation.

State laws governing partnership formation will vary; additionally, the procedure for partnership termination or dissolution may vary according to whether the partnership is a general partnership or a limited partnership. Dissolving a general partnership frequently occurs whe a partner dies, becomes incapacitated, or formally expresses their desire to disassociate from the partnership.

Withdrawing from a limited partnership does not generally automatically terminate the entire organization. One or both of the partners will need to file termination papers with their state’s business authorities.

A partnership may dissolve if the business is no longer profitable, and should close in order to avoid further expenditures. Alternatively, a partnership may dissolve if the business has grown so much that it needs to re-organize as a more expansive form such as a corporation. Or, the partners may engage in a business divorce.

“Business divorce” is a relatively new term, referring to instances in which business partners decide to part ways from one another. The term would likely be used in situations where the partners or business members are moving on to other activities, as opposed to completely stopping all business endeavors.

Dissolving a partnership can occur:

• In Writing: One business partner may formally withdraw from a limited partnership, and thereby terminate their role as a partner. For limited partnerships, this may not dissolve the organization; for general partnerships, the withdrawal of a partner will generally dissolve the partnership;
• By Action: There are specific actions which may dissolve a partnership. An example of this would be one partner terminating their own membership by providing information to a competing organization; and/or
• By Law: Courts may impose a dissolution, especially if the organization has been identified with illegal activity.

Generally speaking, there does not need to be a majority vote to dissolve the partnership. If one partner cannot continue, the partnership will usually dissolve as a whole.

What Are Some Common Disputes Associated With Partnership Dissolution?

Dissolving a partnership is associated with some specific legal issues. Some common examples include, but may not be limited to:

• Disputes regarding partner shares and profits;
• Disputes involving the risks and losses incurred by the organization;
• Disputes associated with changes in management and other internal matters; and
• Issues associated with copyrights, trademarks, and other protected information.

A lawsuit is generally required in order to settle such disputes. Remedies often include a damages award intended to help compensate the non-violating party for losses caused by the dispute.

A specific example of a common dispute associated with partnership termination would be when one or more of the partners disagree with the decision to terminate the partnership. The partners would need to consult the partnership agreement, as that document should state procedures for termination and conflicts. A similar situation would be when the remaining partner contests the withdrawal of a partner from a contract or business deal.

Another common dispute associated with many partnership dissolutions would be the issue of property distribution. How business property is distributed will likely depend on whether the partnership is general or limited. For general partnerships, the partners are most commonly entitled to equal distributions of partnership property. For limited partnerships, the property is frequently distributed according to each partner’s individual contributions to the partnership.

Can I Face Liability In a Partnership?

The amount of potential liability that a person may face as part of a partnership is directly determined by the type of partnership that was formed. There are three types of partnerships:

• General Partnership: The most common type of partnership is formed by the association of two or more people intending to be co-owners of a business for profit. General partners are individually and jointly responsible for any losses or debts incurred by the general partnership. Additionally, they are liable to third parties in tort or contract law claims against the partnership, and to the other partners in the event of a breach of their fiduciary duties to the partnership;
• Limited Liability Partnership (“LLP”): An LLP allows the individuals to be free from the debts and liabilities of all the other parties. It also frees them from certain debts and liabilities of the partnership. Partners to an LLP have the same financial rights and obligations as a general partnership; however, forming an LLP does require filing with the state. Partners in an LLP are not liable for partnership obligations of any kind. However, every partner remains liable for their own acts, or any acts that they supervise or direct. What this means is that unlike general partners, they are not exposed to unlimited legal liability; and
• Limited Partnership: In a limited partnership, there are general and limited partners. A general partner makes management decisions, while a limited partner does not. As such, limited partners have limited authority over the partnership. General partners are both individually and jointly responsible for any liabilities or debts incurred by the limited partnership. Alternatively, limited partners are only liable to the extent of their investment in the limited partnership.

Do I Need An Attorney For Assistance With Dissolving A Partnership?

If you are part of a partnership, and wish to dissolve, you should consult with an experienced and local corporate lawyer. An attorney can inform you of your rights and responsibilities according to your state laws, and can help you legally dissolve a partnership. Further, should you experience any legal issues or disputes, a business attorney will also be able to represent you in court, as needed.