According to business law, specifically The Revised Uniform Partnership Act, a partnership is an association of two or more parties in order to proceed as co-owners of a for-profit business. It is important to note that it does not matter if the individuals intended to create a partnership; what matters is that the parties intended to carry on as business co-owners. This is determined by whether they share in the business’ profits, and whether they have the right to control the business.
An example of this would be if two people open a cafe together. The two parties split the profits, as well as make joint decisions regarding the cafe. Although they do not refer to each other as business partners, their relationship would meet the definition required to form a legal partnership.
What Is Partnership Dissolution? Under What Circumstances Can a Partnership Be Dissolved?
The term “partnership dissolution” refers to the termination of a partnership. It may also refer to the business’ various business activities ceasing. There are a number of reasons why a partnership can dissolve. When a partnership dissolves, the partners receive an equal share in terms of profits and gains; however, they also receive an equal distribution of losses as well.
Generally speaking, there are no tax consequences from dissolving a partnership. However, the partners will need to account for all properties involved in the business, as well as whether those properties have appreciated in value over time.
It is common for general partnerships to dissolve if any partner withdraws, dies, or becomes otherwise unable to continue their duties as a business partner.
Other common examples of circumstances that could lead to partnership dissolution may include, but not be limited to:
- Loss of profits;
- Declaration of bankruptcy;
- Illegal activities;
- Violations of various business partnership laws;
- The merging of a partnership with a larger entity;
- Changes to the business’ registration status, such as switching to a corporation; and/or
- The fulfillment of conditions as stated in the partnership agreement, such as the production or sale of a set number of products.
Finally, it is important to note that some limited partnerships may not dissolve automatically if a partner withdraws or dies. The company may continue on, which is especially true if the partnership has sufficient managerial capacity in order to keep up with business activities.
What Is Partnership By Estoppel?
Estoppel is a principle or judicial device intended to prevent, or estop, a person from going back on their word. This person is referred to as being “estopped,” and may be prevented from bringing a certain type of claim. As previously mentioned, based on statements and/or conduct, the court may consider you a partner whether or not you have actually, intentionally entered into a partnership agreement.
Partnership by estoppel would mean that a person, who is not technically a partner, may be held legally liable as a general partner would be. Such liabilities include any debts and damages that are owed to a third party.
Under partnership by estoppel, the court declares that a person is a partner, even though they have not formally registered themselves as a partner with the company in question. Once a partner has been declared as a partner by estoppel, it is as if they are a “normal” business partner. As such, termination or dissolution of the partnership can occur if that person were to withdraw their participation from the organization.
What Is a Partnership Agreement? Who has Control In a Partnership?
A partnership agreement is between the partners, and describes the relationship that each partner has with the business. Additionally, the agreement outlines the rights and obligations that each individual partner has to the partnership.
Some other examples of what should be included in a partnership agreement include:
- The amount of the partnership owned by each partner;
- Which of the partners have the authority to make business decisions on behalf of the partnership;
- The method that the partners will use in order resolve business disputes among the partners;
- How the partnership is to be dissolved or transferred;
- The process for adding new partners, if any; and
- Other policies or procedures that the partners have in place in order to make major decisions, or address important aspects of the partnership.
Control in a partnership can be determined by focusing on ownership, management, and the authority to conduct business. This is why it is imperative to clearly define these concepts and which partners they apply to in the partnership agreement.
Generally speaking, unless the partnership agreement states otherwise, all partners have equal rights to control a partnership. What this means is that issues require a majority vote of the partners, such as decisions regarding ordinary day-to-day business operations. Matters that are outside the scope of daily operations will require the consent of all partners involved, such as the selling of the partnership.
What Else Should I Know About Partnerships? Do Partnerships Pay Taxes?
General partnerships are the most common type of partnership. The most significant difference between a general partnership and limited partnership would be that all of the partners in a general partnership can be held individually and jointly responsible for any debts and liabilities resulting from the partnership.
Under a limited partnership, there are two kinds of partners. These partners are limited partners, and general partners. Although there may be one or more of either type of partner, there must be at least one general partner in order to have a legal partnership. The general partner is most commonly responsible for management decisions, as well as the day-to-day business operations.
Alternatively, the limited partners are only responsible for investment duties. As such, they have limited authority over the partnership, and are only liable up to the amount that they have contributed to the partnership. This is in contrast to how general partners are responsible for all of the debts and liabilities of the limited partnership.
Generally speaking, a partnership does not pay taxes on the income that is generated by the partnership. Rather, it is what the IRS refers to as a “pass-through entity.” What this means is that the individual partners will pay taxes on their share of the business income; the business income “passes through” the business and on to the partners. The partners then report their share of profits and losses on their own individual income tax returns. Additionally, partners are required to pay self-employment tax on their partnership income.
Do I Need an Attorney to Dissolve a Partnership?
Because the process to dissolve a partnership can vary from state to state, you should consult with an experienced and local corporate attorney. Someone local to you will have the best understanding of your state’s laws, as well as how those laws will affect your legal options moving forward. An experienced business attorney can help from the beginning of the partnership process, such as drafting or reviewing your partnership agreement in order to ensure that it is legally sound and enforceable.
If you find that you must dissolve your partnership, an attorney can also help you understand the process for doing so. Depending on the specific type of partnership, as well as the basis of the court case, the attorney can also represent you individually or represent the entire partnership as necessary.
