DISSOLUTION AND TERMINATION OF A PARTNERSHP
I cannot count the number of times I have been asked how one can walk away from a partnership. My initial question is always: “Is there a partnership agreement?” A good agreement should make the dissolution/termination as amicable and cost-effective as possible. Unfortunately, absent an agreement to govern this process, the steps to dissolve/terminate a partnership can be stressful and expensive.
Understandably most business people do not appreciate the “ins and outs” of dissolving a partnership. Legally, this “dissolution is the change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.” People are surprised to hear that a dissolution does not mean the business has ended or that any assets have been distributed to the partners. They are counseled that dissolution may be caused in 3 ways: (1) by an act of the parties; (2) by the operation of law; or (3) by a court decree.
- Act of the Parties.
- Most partnership agreements do not have a specific date for termination; a good agreement usually states a certain time or particular achievement for its termination.
- Mutual Assent. The partnership may end if all of the partners agree.
- Expulsion of a Partner. If any partner is expelled from the business according with an agreement, this will result in termination.
- Partnership at Will. This is when by the express will of a partner when no definite term or particular undertaking is specified.
- Operation of Law.
- Partnership Activity Unlawful. An event that makes it unlawful for the business to be carried on dissolves the partnership.
- Death of a Partner.
- Court Decree. Here one or more partners can ask the court to dissolve the partnership.
- When a partner willfully breaches the agreement.
- The business can only be carried on at a loss.
- When a partner’s conduct tends to “affect prejudicially the carrying on of the business.”
- A partner has been declared mentally ill or incompetent in a judicial proceeding.
- A partner is shown to be incapable of performing his/her part of the partnership contract.
- The court determines that other circumstances would render a dissolution equitable.
Another surprise situation occurs when a partner is informed that generally, the dissolution of a partnership only terminates the authority of any partner to act as an agent for either the partnership or the other partners, except for the purpose of winding up the affairs of the partnership. (The winding up of a partnership can be complex, and as such is not suitable for this article)
Next comes the distribution of the assets – sometimes called a final accounting. Usually this involves the payment to outside creditors, then to partners based on the specific contribution they have made to the partnership. Then termination.
The best advice for people who are considering entering into a partnership is to first seek competent counsel to address all of these areas and have all of the partners agree and sign a written partnership agreement. Furthermore, even if you are currently in a partnership without a written agreement, you can still enter into one, as an agreement is always in the best interest of all of the parties and all of the partners.
Mark A. Alexander
5080 Spectrum Suite 850
Addison, Texas 75001