Entering into a business partnership is a lot like getting married. You entangle your financial future with someone else with the intention of it lasting forever.
That’s not always the case, however, and sometimes even the most celebrated partnerships must come to an end.
No matter the reasons for dissolving a partnership, it’s always better to make a clean break and end on good terms. You also do not want to end up liable for future business issues, including debts.
Are you concerned that you may need to dissolve your current partnership?
If you want to continue operating the successful business or simply want to end peacefully, here are 12 important things to consider when dissolving a partnership.
1. The Type of Partnership
The type of business partnership makes a big difference in how you go about dissolving it. If you don’t know already, you need to figure out if you have a:
- General partnership. You did not form the partnership through a state filing and do not pay ongoing state fees or franchise taxes.
- Limited partnership. One partner, known as the general partner, has unlimited liability and the other partner(s), known as the limited partner(s), have limited liability. This means that their personal assets are not collateral and they do not manage day-to-day operations. The limited partners act more like silent investors.
- Limited liability partnership (LLP). Only certain professional service businesses like doctors, attorneys, architects, accountants, dentists, etc. can create an LLP. The assets of partners in an LLP do not act as collateral for business liabilities or debts.
Use this information to determine what kind of partnership you have or double-check your partnership agreement.
2. Do You Have a Partnership Agreement?
A partnership agreement is like a pre-nuptial agreement for your business. If you have a partnership agreement, it hopefully includes a dissolution of partnership clause that details how to proceed.
Some agreements include very detailed dissolution procedures based on the various possible circumstances for why a partnership might end.
Be sure that before you sign a dissolution agreement, that you and your partner(s) complete all duties and obligations, so nothing remains outstanding.
Dissolving a Partnership Without an Agreement
If you do not have a dissolution of partnership clause or a partnership agreement at all, you need to proceed carefully. Only discuss the situation with your partner(s) when you have clear and level heads.
Ideally, you’ll be able to work out the partnership dissolution between yourselves. If not, you can always turn to outside help or get a court order. Don’t involve the courts until you exhaust every other possible avenue in order to avoid the expense and heartache.
3. Applicable State Laws
If you do not have a partnership agreement that covers what to do if you decide to end your partnership, you can always follow your state’s business laws.
4. Does One Partner Want to Hold onto the Business?
Do you or one of your partners want to hold onto the business and continue running it after the partnership dissolution? In this case, much depends on the type and status of that departing partner.
Does the partner who wants to leave have the majority share and control most of the business? If so, you and your other staying partners, if there are any, must buy out the leaving partner’s share if you want to continue operating.
5. Can You Sell the Business?
The same requirements apply to if you want to sell the business. It’s quite likely that you and any other partners will need to buy out the leaving partner’s share before selling the business.
6. Make a Plan for Dissolution of Partnership
Once you decide to end the partnership, you should make a comprehensive dissolution plan to ensure you do not miss anything.
Important: Ending a partnership incorrectly when you have liability results in you remaining liable for the business’s future actions even if you are not a part of the decision-making process.
Some things to include in your dissolution plan are:
- A rough timeline for ending the partnership from the initial decision to the legal dissolution and the business’s final tax return,
- A detailed list of tasks required to end the partnership, like an independent valuation of your business,
- The remaining payments to attorneys and federal or state tax agencies as well as who is responsible for the payments and when they must be made,
- Documents you need to file like state entity docs and your final tax return, and
- When you plan to alert business stakeholders like customers, employees, vendors, and contractors about the changes.
7. Get Professional Help
Do you not have a partnership agreement that includes a dissolution clause? You definitely should hire an attorney to help you navigate the dissolution process. Even if you do have an agreement with a dissolution clause, hiring a business attorney with experience in ending partnerships will help take the pressure off. You’ll know for sure that you’re addressing everything correctly.
Are you and your partner(s) struggling to end things amicably? That’s where a mediator can help. Always try mediation before turning to an attorney or seeking a court-ordered dissolution. This helps you save face and stay in the goodwill of your customers if you want to continue operating the business without your partner(s).
8. Inform Customers, Clients, and Suppliers
Some states require businesses to publish a notice of partnership dissolution in the local paper or trade journal.
You must also directly inform all stakeholders regarding the dissolution. This includes customers, clients, vendors, suppliers, and anyone else you’ve dealt with while in the partnership.
Notifying these important people tells them who to contact in the future regarding the business. It also lets them know who is responsible for any future obligations or debts.
9. Cancel All Registrations, Licenses, or Permits
Be sure that you cancel or terminate any registrations, licenses, and/or permits relating to the business partnership.
You may reregister or apply for the licenses and/or permits once you reestablish ownership over the business. Keep in mind this also includes fictitious name registration.
10. Settle All Accounts and Pay Taxes
Prior to signing the final dissolution agreement, double-check that all creditors and taxes have been addressed.
You need to settle all accounts and close bank accounts in the partnership’s name. This also includes payroll tax deposits and the filing of required employment tax forms.
Remember to notify federal, local, and state tax agencies of the partnership dissolution and new business arrangement as well.
11. Examine and Correct Leases, Contracts, and Other Business Agreements
Finally, review and correct any leases, contracts, and other legal business agreements under your partnership. Get outside help if you do not know how the dissolution will affect each of them.
12. Receive Owed Money
Once you and your partner(s) finally sign the dissolution agreement and formally end your partnership, it’s time to deal with the money. The entitled parties will receive their initial investment back.
Then, after paying down debts and any attorney’s fees, you will distribute the remaining profits and assets based on the ownership interest of each partner.
Dissolving a partnership is never easy. The strong financial and legal ties in a business partnership require careful planning and understanding to break, especially if you want to end on good terms.
Follow the advice above to avoid legal complications or losing out on future business because of an ugly breakup.