Many partnerships end when both partners have met a certain objective and their partnership is no longer needed. Sometimes, a partner is no longer necessary when the business can become a new entity, such as a corporation. Other situations such bankruptcy or the retiring of a partner can also lead to the dissolution of a partnership. In most cases the terms for dissolution of partnership are included when drafting the initial business agreement.
Process of Dissolving a Partnership
The process of dissolving a business partnership varies by state business laws. In order to dissolve a partnership in California, the partners must file a statement of dissolution, which officially declares that the partnership is dissolved. California law states that the business must notify all creditors, vendors, suppliers and customers of the dissolution of the partnership, as well as if they are forming a new entity. The business is also required to publish a legal notice in a paper of general circulation for at least 12 days. As soon as those terms are met, the partnership no longer has authority to enter into contracts and any unknown creditors will have 90 days to make debts known.
The process of dissolving a partnership may be an extensive one without the right preparation. To avoid complications, a dissolution clause in a partnership agreement should be drafted and understood between all partners of the business. A well-written partnership agreement should include a dissolution clause or terms of dissolution. Typically it is not legally required for a business to file a state’s dissolution of partnership form, but it can act as additional proof of the dissolution of partnership.
Before filing any paperwork, you must evaluate the state of your business. Have you and your partners completed all duties previously agreed upon? What is the business worth, and how will the business assets and liabilities be divided? Will the business partners be bound to any contracts even though the business has been dissolved? Courts typically divide the assets and liabilities of a business equally between the business partners regardless of the disputes.
Once the process of dissolution has begun, it is important to outline the terms of the split to and protect yourself from any complications that may arise in the future. Partners must all communicate and agree with the terms to avoid complications in the future, such as misinterpretation of certain terms of dissolution.
Terms of Dissolution
When there are no provisions in a partnership agreement, or if the partnership did not form on a formal agreement, then all partners meet to discuss and decide on the terms. It is essential that all partners come to an agreement on the terms. If there is a conflict of interest, hiring an unbiased third party may help partners come to a consensus. Partners could also apply for a court-ordered dissolution, however, this method is often not preferred as it is costly and may not provide the best solution for all parties.
Even if a partnership agreement does contain a dissolution clause, it may be best to also draft a partnership dissolution agreement. The agreement would further elaborate on terms in the dissolution, such has how obligations and debts should be handled. An agreement of dissolution would clarify all miscommunications and ensure that all partners are satisfied with the condition to avoid future conflicts.
After dissolving a partner, you may choose to continue the business alone. You may consider restructuring the company as a limited liability company (LLC). The partners of a LLC are protected from personal liability for debts and other claims. It is extremely important to notify customers, suppliers, and authorities if you plan to continue the business after dissolving the partnership. The dissolution of a partnership could occur for many reasons. It is important to take all necessary precautions and include a partnership dissolution agreement to ensure a smooth dissolution process.