Partnership Dissolution Defined
Partnership dissolution refers to the termination of the business affairs of a partnership. The reasons for the dissolution of a partnership can vary, from changes in the economic environment to conflict among partners. A partnership may be dissolved if a partner: Partnerships may also dissolve by agreement of the partner. The decision to dissolve is not always the result of some internal or external conflict. Sometimes it is simply that partners have come to the realization that they no longer wish to work together, and that it is in their best interest to amicably terminate their relationship rather than to remain in a partnership that is stagnant or that has become inefficient . Partnerships that are formed for a mutually agreed period may be dissolved upon the expiration of that period. In addition, many states permit the court to dissolve a partnership on application of any partner when: Some partnerships dissolve without the intent of the partners, such as when the business is acquired or sold. In such cases, the dissolution is usually governed by the sale agreement unless it specifically provides otherwise.
Signing a Partnership Dissolution Agreement
A dissolution of partnership agreement is a legally binding document between the two partners in a business venture for either a specified or indefinite timeframe. This is important when both parties to the partnership agreements have to wind down the business either voluntarily or involuntarily.
They are suited to describe the terms by which either the assets will be sold or split, how liabilities will be shared, how is the business reorganized, and how are the partners going to split the profits or the loss as the case may be. However, they cannot address all the issues or fill in all of the gaps that arise where the partnership is unwound.
The partnership agreement should be drafted so as to insure that it provides input from both parties so that it is fair to both parties, and once completed it should be signed by both parties to memorialize its content. It provides a basis for discussion and negotiation when problems arise between the partners as to what happens next. A good partnership dissolution agreement should include provisions that describe the rights, responsibilities and duties between the parties.
If you don’t have a partnership dissolution agreement, disputes arise as to how the partnership is unwound, who has to pay off creditors, etc. Without a dissolution agreement, problems also occur as to how to value the business, what happens to its goodwill and intellectual property, how are employee salaries paid, how are taxes to be paid, what to do with employees, how are customer contracts to be handled, etc. From time-to-time, it is necessary to get a court involved, especially when one of the partners is not cooperating with the wind down of the business. When this happens, it can be both time-consuming and costly.
Avoid the enormous costs and time that can go into the dissolution process. A well drafted partnership dissolution agreement can eliminate many issues and allow for an amicable wind down of the business so that both parties to the business can move on with some measure of goodwill intact.
Important Aspects of a Partnership Dissolution Agreement
A dissolution of partnership agreement is written when the partnership ends. There are three aspects that are essential to include in any dissolution of partnership agreement: division of assets, handling of liabilities and the timeline for dissolution. In a business it may be necessary to divide intellectual property or valuable assets. You want to make clear how any such assets will be divided, and contain the necessary provisions in the dissolution of partnership agreement. Some types of liabilities can be personal guarantees for which the partnership will be holding individuals responsible, who may end up needing to provide funds to the seperated entity to meet the liability. You want to be clear on how liabilities are being handled. Is an individual partner still responsible for loans signed by the partnership for which they personally guaranteed? Are they equally responsible to help repay other loans, leases, vendor invoices, etc. for which they have not personally guarranteed? These are questions to address in your dissolution agreement. You also will want to include an agreed timeline for the dissolution, including specifics amounts of time for each partner to meet their obligations that are outlined in the agreement.
How to Create a Step-by-Step Template
To draft a dissolution of partnership agreement template, start by introducing the purpose of the dissolution and identifying the parties involved. Include relevant dates, such as when the partnership was established and the effective date of the dissolution. Next, outline the dissolution process, specifying the required notice period and the methods of providing notice to the partners. Specify how the assets, liabilities, and profits will be divided among the partners, including methods for valuing assets and settling debts.
Outline the remaining obligations of the partners after the dissolution process is complete, such as filing tax returns or resolving pending legal matters. Consider including a choice-of-law clause specifying which state’s laws will govern the interpretation of the agreement. Additionally, incorporate provisions explaining the amendment process for the agreement and the circumstances under which the agreement may be terminated prior to the effective date of dissolution.
To make the template more user-friendly, consider including sections for dates and signatures, as well as checkboxes for common scenarios, such as an amicable or contentious dissolution.
Avoiding Common Mistakes
Now that we have gone over the different considerations when creating a dissolution of partnership agreement, let’s cover the common mistakes so you can try and avoid them. The most common mistake that people make when trying to create a partnership dissolution agreement, whether they are using a template or not, is that they often forget to or leave vague some of the details that are essential to a successful agreement. Without the necessary details your dissolution can be open to interpretation in the future and does not allow for protection in the event that you and the other partners cannot agree. The best way to avoid this mistake is to be as specific as possible in your agreement. Another mistake is to leave out any provisions that protect you from liability . Some people think that because the partnership is being dissolved there will be no future liability, but it is important to note that any liability that occurred during the life of the partnership can still come back and haunt you even after the dissolution is finalized. If you were to forget to list an asset that was owned by the partnership in your agreement, you could have problems later on. It is important to include every asset in the partnership, not just the big ones. A joint water cooler could be considered an asset and if you did not list it in your agreement, it could become a problem later. Be sure to include everything you can think of to avoid potential problems later on. Do not sign your agreement without consulting an attorney. Even when you are just using a template, you still want to have the agreement reviewed by an attorney who can make sure it is solid and that there are no weaknesses. Your attorney can also help you to better understand your rights and responsibilities under the agreement.
Partnership Dissolution Issues
Dissolving a partnership doesn’t just require an agreement between the partners but also requires compliance with various laws and regulations. For example, some states require notifying government agencies and the local health department before dissolving a partnership. Public notice concerning the dissolution may also be a requirement. A partnership may have contracts or licenses that don’t permit a transfer of control or ownership. Licenses may also need to be renewed following a new application process.
Partnerships should also consult with an attorney to verify how to dissolve the partnership legally and formally. Partnerships are still subject to many laws regardless of whether it’s doing business as a general partnership or limited liability partnership. This includes laws governing taxes, employment and civil rights. Legal counsel can guide owners on the proper process to dissolve the entire business or just withdraw a member.
Conclusion and Next Steps
We hope this brief overview has provided you with a practical insight into what you need to include when compiling a dissolution of partnership agreement template. Due to each partnership being unique long term partners should talk over terms that are not clear or seem unreasonable. The dissolution agreement will be a very important document which both partners will want their names to be linked to and to affect their finances. It can help avoid deceptively ambiguous terms entering the partnership that would make unwinding it costly. Clarity is important and should be the ultimate goal. Once the dissolution is confirmed and finalized be prepared to advise professional advisers as soon as practicable. A termination will involve a lot of legal , accounting and tax work and it is something that both partners will want to get right. It will also involve quite a few costs so the sooner you do it the less long term impact it will have on your personal finances. Depending on your role in the business you might also be interested in finding out whether it is viable for you to join your former partner’s ongoing business even if it means starting again from scratch.