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Is It Time to End Your Business Partnership? Here's How

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Is It Time to End Your Business Partnership? Here's How

By Caron_Beesley, Contributor
Published: September 16, 2013 Updated: September 16, 2013

Partnerships fail for many reasons. Misalignment of personality is possibly the first reason that springs to mind, but according to Michigan law firm Family & Aging Law Center , the two most common reasons that business partnerships fail is 1) failure to make an adequate plan, and 2) more importantly, from a legal perspective, failure to have a written partnership agreement that outlines in detail the partnership structure.

Why is the partnership agreement so important? Most partnership agreements are written up at the beginning of the business venture and outline how the partners will run the business – how business decisions are made, how responsibilities are divided, how disagreements will be resolved and so forth. A good one will also include a dissolution strategy, like a prenuptial agreement. Although not required by law, it can be extremely risky to operate without one. Essentially, a good agreement brings structure and agreement to the partnership – without one, partnerships run the risk of being run like separate businesses within the business, with each partner doing (or not doing) their own thing!

Without a partnership agreement, dissolving a partnership can get nasty and carry a lot of risk. For example, if a partner isn’t paying bills on time or making regular contributions to pay off a business loan. Lapses and disagreements like these can quickly spiral out of control and impact your creditworthiness, relationships with vendors and so on.

Even if you do have a partnership agreement, you are carrying an element of shared liability. Each partner is liable for the actions of the business, its debts, and of course, you also have to split profits.

So what are your options when it comes to dissolving a partnership that’s gone bad? Here are some considerations to bear in mind for those who have partnership agreements and those who don’t:

  1. Change the weighting of the partnership agreement

You don’t have to dissolve the partnership entirely. Perhaps you might change the weighting of the partnership so that you assume a majority share and with it more control over decisions and/or finances, while your partner agrees to remain involved, but to a lesser extent than currently.

  1. Buy out your partner or sell your share

If you want to continue the business, you could buy your partner’s share, or sell yours if you want out but your partner doesn’t.

  1. Legally dissolve the partnership

If you have a partnership agreement, revisit it and review your dissolution plan. Then take a look at the current state of your business to ensure a clean break. For example, have all partners completed all agreed duties? What’s your business worth (use a third party valuation firm to help pinpoint this number)? What about leases, loans, and other contracts – how will the dissolution affect them and who will own the continued liability?

As you can see, there are many considerations, so make sure you consult a lawyer to help protect your interests in any dissolution or restructuring of the partnership. They can also help draft a dissolution agreement that protects you from future disputes or claims that may be brought against you.

It’s also important to note that any dissolution of that partnership is governed by state law. Visit your state’s website for more information about the process and the forms you’ll need. It can take up to 90 days for the dissolution to become official. Once your partnership is dissolved, you can typically expect each partner to assume business assets and liabilities based on percentage of ownership.

  1. When there’s no partnership agreement

If you didn’t have a partnership agreement that outlined a dissolution strategy, try to work out terms together. If not, an intermediary may be able to help you resolve your dispute through mediation. Many law firms offer these services. Your final resort is a court-dictated decision which could be costly and may not provide the result you were looking for. Courts often divide assets and liabilities 50-50 regardless of any disputes.

Other factors to consider

Don’t forget to let the IRS and state revenue office know that you are no longer in partnership the next time you file a return. Notify customers, vendors and others that your business structure has changed or dissolved. You’ll also need to take care of other loose ends such as business licenses, permits and canceling a trade name or “doing business as” name with your local government. Refer to SBA’s Closing Your Business guide for more information.

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

These are great tips from a legal standpoint. Making the decision to dissolve a business partnership is tough one and should be made carefully. Never make snap judgements or act on emotion when evaluating a business relationship. Always give yourself time to think through these decisions calmly and weigh the pros and cons before taking action. Always have the future success of your business in mind.
To successfully implement a first important work, then you must set up a plan is complete, it is the most important thing at this time otherwise you will not have a chance to finish it in expecting it.
A well written partnership agreement should include a provision addressing divorce and applicable community property laws. In the event any partner gets divorced, their partnership interest will likely be part of the marital estate subject to division in the divorce action. The partnership agreement should prescribe a course of action in the event of divorce, or require that all partners execute pre/post nuptial agreements with their spouses.
This is great information!! As a matter of fact one of the partners here is retiring and has had to deal with all the legalities of it.
All the points above were great, although I think one really important point missing was: Don't forget the strong Separation Agreement. No matter what the circumstances employed to end the partnership or leave the partnership, never, ever leave a partnership without getting a separation agreement signed between all the owners. This document is key to protecting everyone, and ensuring that the debts, liabilities or other problems of the business after you've left don't come back to haunt you. Furthermore, it helps keep everyone honest and ensures that whatever agreement was made in terminating the partnership is honored and fulfilled.
I agree that planning is the key . I always advise a well thought out exit strategy from the outset. If you don't know where you want to go you may end up somewhere else. Dorene Lehavi, PhD This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.
It is true that partnership are mostly failure nowadays but breaking or dissolving them, can be a difficult call, since there are many factors which has the capacity to create problems at both the ends. Hence it has to be done tactfully & also under the guidance of legal personal.
This was a good read. I learned the importance of having EVERYTHING in regard to a legal/business partnership kept in writing before entering a partnership.
When one partner decides to leave the partnership, it is better to give a written notice to the other parties involved with proper reason, so that there will be no doubt involved. Also when partnership break up, do it legally, following the guidelines of your contract.
"Buy out your partner or sell your share" I don't thinks so.

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