Dissolve a Partnership

A partnership is a business association of two or more legal persons (e.g. individuals, groups of people, corporations) that operates for profit.[1] When a partnership agreement comes to an end, the partnership is said to be dissolved. Dissolution of partnerships is generally governed by state law.[1] Partners may wish to dissolve the partnership agreement for a number of reasons, such as a desire to retire or a lack of interest in continuing the business relationship.[2] Whatever your reason may be for dissolution, it is in your best interest to aim for a “clean break”, which will offer peace of mind to all parties involved and will ensure that the business relationship comes to an end amicably.[3]

Steps

Revisiting the Partnership Agreement and Considering Alternatives

  1. Locate your partnership agreement. The ideal way to form a partnership is to draw up a partnership agreement at the start of the business arrangement. This agreement spells out the rights and responsibilities of the partners and contains provisions on how to resolve disagreements. Good partnership agreements contain dissolution strategies. Although the law does not require a partnership agreement, operating a partnership without an agreement can be highly risky. If there is a partnership agreement in place, locate that agreement as soon as possible.[2]
  2. Read your agreement. If you do have a partnership agreement in place, review the agreement for your rights and responsibilities and your options on how best to proceed. Sometimes partnership agreements provide details about dissolution procedures. In some cases, the partners may be required to take an official vote for the dissolution to become effective. Know the terms of your agreement regarding dissolution procedures.[3]
  3. Consider alternatives to dissolution. Once you have reviewed the provisions of the partnership agreement, consider whether dissolution is really necessary. Remember that you have other options as alternatives to dissolution.
    • You might consider changing the weighting of the partnership. This would allow one partner to acquire more decision-making or financial control through a majority share. The partner with the minority share can remain a partner while giving up some control to the other partner. Consider whether doing so would resolve your disagreement.[4]
    • You can also sell your share or buy your partner’s share. This would allow for the business to continue while allowing the partner who wishes not to be attached to the partnership anymore to remove her name from the partnership. Consult an attorney if you choose this option so that your interests are protected during the buying or selling process.[2]

Reviewing Your Business

  1. Review your leases, contracts, and loan agreements. Before initiating legal termination of the partnership, review your business as it currently stands. Consider, for example, how your existing contractual obligations will be affected by the dissolution. Are you locked into a contract? Will those contractual obligations continue regardless of your partnership status? Review your existing contracts, loan agreements, and leases to determine your partnership’s obligations to third parties and determine how dissolution will impact those liabilities.[2]
  2. Determine how much your business is worth. This is important because once the partnership is dissolved, each partner will typically assume business assets and liabilities based on a percentage of ownership. You can get a third-party to conduct a valuation of your business for you.[2]
  3. Complete all agreed upon duties. Determine whether you and your partner(s) have completed all agreed upon duties.[2] Doing so will minimize disagreements during the dissolution process and will minimize any legal issues that you might face during the dissolution. Importantly, after the dissolution agreement has been signed, the original partnership agreement becomes void. Therefore, make sure that all parties’ interests have been taken care of before the original agreement becomes void. Not doing so can result in one party suffering a loss because his rights under the original agreement are no longer enforceable.[3]

Drafting a Dissolution Agreement

  1. Draft a dissolution agreement. A well-drafted dissolution agreement can both dissolve the partnership and prevent future disagreements. A dissolution agreement can also maximize your legal defenses in case you are sued during the dissolution process.[3]
  2. Identify the document, date, and relevant parties. When drafting your dissolution agreement, identify the document as a “dissolution agreement.” Identify the partners and write the date on which the document will be signed.[3]
  3. Write the recitals. “Recitals” are those clauses that define the agreement and present important background information about the parties. In the recitals section, provide the following information:
    • A brief description of the purpose of the partnership;
    • The total amount of capital contributions that each partner made to the partnership. This includes both initial capital contribution and later contributions made specifically to the capital of the partnership (in other words, do not include loans or extensions of credit in the 'capital contributions' amount). Provide a separate entry for each partner with this information.
    • Mention the language of the partnership agreement that covers dissolutions. List the specific steps that your partnership agreement requires for dissolution to be completed. Summarize those steps and write them down. If your partnership agreement contains no information about dissolution, consult your state’s laws governing partnership dissolution.[3]
  4. Provide details about the partnership as a legal entity. This information includes the name of the state in which the partnership was established, the name of the partnership, and the current principal address of the partnership.[3]
  5. Provide the specifics of dissolution. This information includes an explanation that each partner will assume assets and liabilities in proportion to their interests in the partnership. You can change the percentage of interests of each partner if you want to in the dissolution agreement.[3]
  6. Describe the role of the liquidating partner. The “liquidating partner” is the partner (or partners if more than one) responsible for the administrative tasks of dissolution. Describe what those tasks are and what specific task each of the liquidating partners will be responsible for. E.g. which partner will be responsible for terminating leases, which partner will be responsible for filing the dissolution with the secretary of state office, etc.[3]
  7. Provide for the custodian of books. Decide which partner will be responsible for the partnership’s records after the dissolution. That partner will be designated as the “Custodian of Partnership Books.” This provision is optional and you may not wish to include it in your agreement or it may not be relevant to your situation.[3]
  8. Provide statements on indemnification, release and discharge, and amendments. Your dissolution agreement should also contain a number of miscellaneous provisions designed to avoid legal liability. These provisions include:[3]
    • A provision for indemnification, which is a statement that the partners have agreed to divide the assets and the debts of the partnership on a pro rata basis. The purpose of this statement is to protect the partners in case one partner defaults. The defaulting partner in that case would be required to reimburse the other partners for the payments made to cover the default.[3]
    • A statement of release and discharge, which says that after the dissolution, partners cannot bring claims against other partners for partnership-related matters. This section should, however, provide for the possibility of bringing a lawsuit in case a dispute arises regarding the dissolution agreement.[3]
    • A statement that any changes to the agreement must be in writing and signed by the partners.[3]
  9. Provide statements on governing law, implied waiver, and signatures. Your dissolution agreement should also contain statements about what law governs interpretation of the document, a statement excluding implied waiver, and rules on signatures.
    • A statement about governing law. This allows the parties to choose which state’s laws will govern the interpretation of the dissolution agreement. Note that this provision does not mean that a lawsuit can only be brought in that state; it only means that the chosen state's law shall govern interpretation of the document.[3]
    • A statement excluding an implied waiver. This means that you should write that even if one partner allows another partner to ignore his obligations under the dissolution agreement, the former partner does not waive his rights under the dissolution agreement.[3]
    • A statement on signatures. Write that even if partners sign the agreement in different locations or use electronic signatures, all of the separate pieces will be considered part of the dissolution agreement. Allowing for electronic signatures will make this process more efficient.[3]
  10. Provide a statement on severability, section headings, and that the agreement is the entire agreement. Your dissolution document should also contain a statement on what happens if part of the document becomes void in the future, a statement on the role of section headings, and a statement that this agreement is the entire agreement.
    • A statement on severability. This means you should write that even if one part of the agreement is invalidated in the future, the entire agreement will not become void. Only the section that becomes void (e.g. because of a change in law) will be invalidated. The rest of the agreement will remain enforceable.[3]
    • A statement that section headings at the beginning of the section of the agreement are only meant to organize the document and are not operational parts of the dissolution agreement.[3]
    • A statement that the partners agree that the dissolution agreement they are signing is the entire agreement. Although such a statement may not prevent a partner from arguing that there are other enforceable obligations in other documents, such a statement may offer some protection against such claims.[3]
  11. Sign the agreement. Sign the dissolution agreement in the presence of a notary public and in the presence of witnesses. Having your agreement notarized and signing it in the presence of witnesses will minimize challenges to the validity of a signature.[3]

Filing the Statement of Dissolution

  1. Locate a Statement of Dissolution form in your state. Dissolution of a partnership requires filling out a Statement of Dissolution (sometimes known as a Certificate of Cancellation). Partnership dissolution is governed by state law, and you will need to visit your state’s official website of the Secretary of State to download a Statement of Dissolution form. [4]
  2. Fill out the form. Once you have located the form relevant to your state for dissolving the partnership, fill out that form. The form is normally one or two pages and asks the following information:[5]
    • The name of the partnership as filed with the Secretary of State.
    • The file number issued to the partnership by the Secretary of State.
    • The form will contain a statement that the partnership is winding up its business and is legally dissolving. Do not alter this statement and know that signing the form means that you agree to this statement.[5]
    • Any additional relevant information that you wish to provide (including the possibility of attaching additional pages as necessary).
    • The name and mailing address of the person or firm to whom the filing will be returned after the process is complete.
  3. File the Statement of Dissolution. The liquidating partner responsible for filing the dissolution should do so as provided by the dissolution agreement. The agreement needs to be filed at the office of the Secretary of State in the state in which your partnership is registered.[3] Depending on your state, you may be able to mail the form or be required to file it in person at the Secretary of State’s office.[5]

Taking Care of Other Important Matters

  1. Terminate permits, licenses and registrations. End your business's partnership permits, its licenses, and its fictitious business name registrations. Permits and licenses should be canceled with the agency that issued it. When you abandon a fictitious business name, you may also be required to notify your county clerk and publicize the termination in your local newspaper.[3]
  2. Give notice to interested parties. It is important that you inform all of the partnership’s suppliers, customers, and clients about the dissolution because they may have an interest in knowing. Do not assume that publishing the information in a newspaper is enough. The liquidating partner responsible for publicizing the dissolution should send actual written notice to the parties.[3]
  3. Take care of tax matters. If you have employees, make sure all of your payroll tax deposits have been made and all of your tax paperwork is up to date. Inform local, state, and federal tax authorities about the dissolution. Sometimes tax returns have the option of marking a box that indicates that you have dissolved your partnership and will not be filing in the future.[3]
  4. Seek help from an accountant. Dissolution of a partnership can have serious tax consequences, so seek help from a Certified Public Accountant (CPA) about the tax consequences of your dissolution.[3]

Tips

  • Give all the partners enough time to review and sign the dissolution agreement. Allow them time to seek legal advice. Doing so will reduce the risk that a partner will later claim he did not understand the agreement.[3]
  • Review the completed agreement carefully to ensure all important points have been included. It is better to be over-inclusive than under-inclusive. Do not assume that an important point is implied if it is not expressly written in the agreement.[3]
  • Give each partner at least one original and signed copy of the dissolution agreement.[3]
  • If your particular situation is complicated, you may wish to seek legal advice to fit your needs.[3] Do not assume that the information contained herein offers adequate advice for all instances of dissolving a partnership.

Sources and Citations

  1. ↑ 1.0 1.1 https://www.law.cornell.edu/wex/partnership
  2. ↑ 2.0 2.1 2.2 2.3 2.4 2.5 https://www.sba.gov/blogs/exiting-or-dissolving-business-partnership-your-options-and-process-explained
  3. ↑ 3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18 3.19 3.20 3.21 3.22 3.23 3.24 3.25 3.26 3.27 3.28 3.29 https://www.legalzoom.com/assets/legalforms/legalzoom%20partnership%20dissolution%20agreement.pdf
  4. ↑ 4.0 4.1 https://www.sba.gov/blogs/exiting-or-dissolving-business-partnership-your-options-and-process-explained.
  5. ↑ 5.0 5.1 5.2 http://bpd.cdn.sos.ca.gov/gp/forms/gp-4.pdf
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