How to End a Business Partnership [+ Formal Agreement]

A business partnership is like a marriage. When things go well it can make your life so much better, but when it’s time to end you’ll be wishing you had a prenup.

Having a partnership dissolution agreement in place in the partnership agreement or written during the dissolution of a partnership does so much for you and your business.

Not only does it protect you from liability, it affects your future credit score and keeps your personal and business assets safe.

Still, what is a partnership dissolution agreement?

How do you write a partnership dissolution agreement?

Can you dissolve a partnership without one?

I’ll answer these questions and more in the article below.

Contact me today at sam@mollaeilaw.com with any other questions you have about how to write and use a partnership dissolution agreement to protect you and your business.

 

What is Partnership Dissolution?

A Partnership Dissolution happens when a partner leaves the business, thus ending the partnership.

There are a lot of reasons where a partner might voluntarily leave the business, such as entering into a new business venture or retiring.

On the other hand, there are also involuntary partnership dissolutions where the other partners force the partner to leave.

In either case, its important to have a solid Partnership Dissolution Agreement on hand in order to protect the partners’ assets and liabilities. Because there are a lot of negotiations and midfields to navigate, having an agreement on hand as a previously agreed upon framework will keep things from getting ugly.

 

Dissolution vs. Termination of Partnership

While the terms Dissolution of Partnership and Termination of Partnership are often used interchangeably there actually are differences between them.

The termination of a partnership happens when it stops its business operation according to federal and state laws. Additionally, the IRS considers the partnership terminated if over half of the assets it has in possession are sold off or otherwise distributed within a certain timeframe.

However during the dissolution of a partnership, the partnership remains active until the agreement has been reached.

A partnership is terminated once the dissolution agreement has been reached and the business operations stop.

 

Partnership Dissolution Agreement

A Partnership Dissolution Agreement is when the partners have a written agreement to end a business partnership.

This is an important document that will protect your assets and liabilities, as well as make conducting business in the future much easier.

You should be aware that the partnership does not immediately end just because you signed the Partnership Dissolution Agreement, however. The partnership goes on until the business’s debts are settled and the business has been terminated and its assets have been redistributed.

Having a Partnership Dissolution Agreement present in the Partnership Agreement will lay out the roles, responsibilities, and what timeline the partnership will dissolve allowing for the partnership to end gracefully.

Because a partnership dissolution agreement is an important legal document, you should have a qualified business lawyer write it for you for the best possible protection. Email me at sam@mollaeilaw.com now so I can get started!

 

Partnership Dissolution Agreement California

You are not required to file a form when your partnership dissolves in California, but if you filed a Statement of Partnership Authority you should file a Statement of Dissolution.

Since some partnerships do file with the Secretary of State upon formation, those particular partnerships should file statements of dissolution to help limit any potential liability they might face.

There is no fee for filing this form, and it should be done as soon as possible.

 

Partnership Dissolution Letter

Partnerships can be dissolved without the desire of the other partners, and when one partner wishes to do so they will send a partnership dissolution letter.

This letter is should be prepared and served like any other legal document, focusing on the legal aspects of the process of partnership dissolution and written to make the process as clear and painless as possible.

One reason to have a Partnership Dissolution Agreement in place in the Partnership Agreement is to avoid being surprised one day by a process server who is informing you that a partner wishes to dissolve the partnership.

 

Partnership Withdrawal Agreement

A Partnership Withdrawal Agreement should include crucial information to make the withdrawal process as clear as possible.

This agreement should have the same information whether it is a voluntary withdrawal of partnership or not, and that information includes the following:

  • Identifying information of the Withdrawing Partner
  • Information about the Partnership
  • Whether the withdrawal is involuntary or voluntary
  • The reason for the withdrawal if it is an involuntary withdrawal
  • Information for the partners who will remain in the partnership after the withdrawal has taken place

 

LLC Dissolution Agreement

Unlike the dissolution of a partnership, the members of the LLC have to take a vote in order to dissolve the LLC.

Your LLC operating agreement should have a written and agreed upon procedure for this vote to take place. If it doesn’t, look up your state’s LLC statutes for how to vote on the dissolution of your LLC.

After this vote, here are a few steps that you should take:

  • Keep a written resolution as a record of the vote
  • Hold onto the resolution in your LLC’s records
  • Notify all of your creditors of the dissolution of your LLC (in some cases, you should do this first)
  • Notify the appropriate tax and licensing authorities and pay any taxes owed
  • Cancel your LLC’s existing licenses
  • Pay remaining financial obligations such as licensing fees
  • Distribute the remaining assets to the members of the LLC
  • File articles of dissolution with the state

Depending on what state you operate in, it’s possible you might have to get a confirmation from the state taxing agency that your LLC doesn’t owe any more state taxes to file with your dissolution papers.

You also need to file documents with any other states your LLC does business in.

 

Notice of Dissolution of Partnership

After you have dissolved your partnership, notify any prudent financial entities such as customers and creditors that the partnership has dissolved.

If you don’t do this, there is a good chance you could be on the hook for any debts that a partner makes with a customer after dissolution if the party did not have proper notice of dissolution.

Whether or not it is a legal requirement to notify such parties of your dissolution of partnership, it’s an important step to take to protect yourself and any new business ventures.

You can satisfy this in many ways like publishing a notice in a local newspaper or sending a letter outlining the dissolution in writing.

 

Dissolving a Partnership without an Agreement

If you have to dissolve a partnership without an agreement, there could be serious consequences.

Even if the partnership dissolution is voluntary you will still have to deal with how to divide up assets and handle the business’s future.

However if the partnership is involuntary it could turn into a legal battle which drains your time, resources, and ultimately robs the company of any future it might have once had.

A partnership dissolution agreement must be written for any dissolution of a partnership even if there was not one in the original partnership agreement to prevent litigation and salvage your business future.

 

What To Do Next

No matter how much you learn about how a partnership dissolution agreement works, you should still have a professional draft it for you.

After all, what business owner has time to spend hours and hours looking up every single law and liability that needs to be covered when a partnership dissolved?

You’re a busy entrepreneur, and I will spend hours tirelessly working to protect your business so you can do what you do best – watch that business grow and be protected in case your partnership does dissolve.

Email me any time at sam@mollaeilaw.com with all of your partnership dissolution agreement questions or so I can get started on drafting yours today.