Exiting or Dissolving a Business Partnership – Your Options and the Process Explained
by Caron_Beesley, Community Moderator
- Created: February 15, 2012, 7:15 am
- Updated: April 30, 2012, 6:59 pm
Are you or your partner trying to exit or dissolve your business partnership?
Business partnerships dissolve for many reasons – one partner may have lost interest, is no longer committed to the business or just wants to retire. Sometimes things just don’t work out.
But how do you plan and execute a clean dissolution of your partnership? What are your options and what legal steps must you take? Let’s take a walk-through your options and your obligations.
Revisit Your Partnership Agreement and Review Your Options
One critical foundation for a clean break-up is a partnership agreement – best established when you formed your partnership. Most agreements 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.
If your partnership isn’t working, revisit the agreement and review your options. Remember, dissolving the partnership isn’t always necessary. You might consider changing the weighting of the partnership so that one partner has more decision-making or financial control through a majority share, allowing a less-committed partner to remain involved while relinquishing some control.
If that’s not an option, and you or your partner wish to continue the business outside the partnership, consider selling your share or buying your partner’s share. Consult a lawyer to ensure your interests are protected during this process.
If either of you want out or you can’t reach an agreement about the future of the business, it may be time to legally dissolve the partnership.
How to Legally Dissolve a Partnership
Dissolving business partnerships is governed by state law, so check your state’s website for information about the process and the forms you need to complete. It usually takes 90 days from filing a statement of dissolution (usually a simple one-page form) to dissolve a partnership.
The process ensures that neither partner will be responsible for the other’s debts and liabilities and, once dissolved, that neither partner can enter into any binding transaction on behalf of the partnership. It also renders your original partnership agreement void.
Before you file any paperwork with your state, make sure you review your current business:
- Have you or your partners completed all agreed duties?
- What is the business worth? A third-party valuation can help you develop this figure. Once your partnership is dissolved you can typically expect each partner to assume business assets and liabilities based on percentage of ownership.
- Review all leases, contracts, and loan agreements to see how the dissolution will affect them. For example, are you locked into a contract period regardless of your partnership status?
Once the partnership dissolution is in process, draft a dissolution agreement with the help of a lawyer. This will outline the terms of the split and protect you against any future disputes or claims that might be brought against you.
What if You Never Had a 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.
What about Taxes?
There are no direct tax consequences of dissolving a partnership, but you will need to account for business-owned property that has appreciated in value and for payment of business and employer taxes. Let the tax authorities know that you are no longer in partnership when you file your final return.
Notify Suppliers, Customers, and the Authorities
Don’t forget to notify customers, partners, and suppliers. If you choose to continue the business in your own right, give the message a positive spin.
You will to tie up some loose ends, such as business licenses, permits, “doing business as” name registrations, and final paychecks for example. Refer to SBA’s Steps to Closing a Business for more guidance.
Continuing the Business?
If you want to continue and grow the business after dissolution, consider restructuring it as an LLC or C Corporation. And it never hurts to get mentoring (organizations like SCORE offer this for free) or legal counsel to help you formulate your new business strategy.
- How to Legally Change the Structure of Your Growing Small Business
- “Working Together” – How to Start and Formalize a Business Partnership
- Selling your Business
- How to Restart a Closed Business
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