In Short
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Reasons for Dissolving a Partnership: Partnerships may end due to factors like the expiration of a fixed term, completion of a specific project, a partner’s decision to exit, insolvency, legal issues, a partner’s death or bankruptcy, or a court order.
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Steps to Dissolve a Partnership: Review your partnership agreement for dissolution procedures. If absent, follow relevant state or territory laws. Ensure all partners agree on the dissolution terms and handle administrative tasks like notifying stakeholders and settling debts.
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Importance of a Formal Dissolution Agreement: Documenting the dissolution in a written deed clarifies the terms of separation, asset distribution, and future responsibilities, helping prevent potential disputes.
Tips for Businesses
Before dissolving a partnership, consult your partnership agreement and seek legal advice to ensure compliance with legal obligations. A formal dissolution deed can provide clarity and protect all parties involved. Address administrative tasks promptly to facilitate a smooth transition.
You may have started your business with a partner with a fixed term in mind or with a hope to work together on an ongoing basis. However, partnerships may come to an end for several reasons. In these circumstances, you will need to consider a number of legal implications to dissolve your partnership. This article sets out:
- the different reasons for ending a partnership;
- how to dissolve a partnership; and
- why it is best to document the dissolution of the partnership in a formal agreement.
What is a Partnership?
A partnership is a type of business structure where two or more people operate a business together as partners. These often take the form of general partnerships, where the partners:
- share equal rights and responsibilities of the business operations and management; and
- are all jointly responsible for the actions and debts of the other partners and the business as a whole.
Reasons for Ending a Partnership
There are a number of reasons why you may choose to end a partnership. Or perhaps you are required to dissolve the partnership under law. Some reasons that you may end your partnership include that:
- you entered into the partnership for a fixed term and that term has expired;
- the partnership was for a particular business venture, that venture has come to an end and there is no further need for the partnership;
- a partner wishes to leave;
- the business becomes insolvent and must cease;
- an event makes the partnership illegal;
- a partner becomes bankrupt or dies; or
- a court dissolves the partnership due to incapacity or unsoundness of mind.
What to Consider When Before You Dissolve a Partnership
When dissolving a partnership, you should primarily consider:
- what will happen to the business after you dissolve the partnership; and
- what each partner’s plans are following the dissolution.
It’s also important to consider whether it is appropriate to put in place non-compete clauses that apply to the partner who is no longer going to be involved in the business.
You will also need to deal with the administrative factors involved in dissolving a partnership. The dissolution of a partnership will effectively mean that the legal structure of the partnership no longer exists. This is true even if the underlying business will continue to be operated by someone else going forward. Therefore, you will need to finalise and wind up any remaining tasks or structures, such as:
- completing and filing all of your tax returns and business activities statements;
- closing any bank accounts;
- fully repaying any outstanding loans and liabilities; and
- transferring ongoing contracts and insurance policies to the new owner of the business.
How to Dissolve a Partnership
Many partnerships will have a partnership agreement that outlines the mutual obligations and rights of the partners. If you would like to dissolve a partnership, the first place you should look to is your partnership agreement.
The partnership agreement should set out:
- when you can dissolve the partnership; and
- the process to do this.
If your partnership is not governed by a partnership agreement, you will still be subject to state or territory-based legislation.
Generally speaking, partnerships can be dissolved when:
- all partners agree to dissolve the partnership;
- where there are only two partners, one partner wishing to leave gives written notice to the other partner of their intention; or
- it is required under the partnership agreement or by law that you dissolve the partnership.
Deed of Dissolution of Partnership
It is best to document the dissolution of a partnership in a written deed of dissolution. This ensures that each partner clearly understands the:
- the terms of the separation;
- what happens to the business; and
- how the partners may deal with each other and the business going forward.
A deed of dissolution will commonly address:
- how the interests in the partnership and the assets of the business will be divided;
- if one partner is purchasing the other partner’s interest in the partnership (including all the assets and goodwill which comprise the business), what the terms and price of this purchase is;
- the requirement that you pay out all liabilities related to the partnership;
- what happens to the existing contracts and customers of the business;
- what happens to the business names and intellectual property of the business;
- the requirement that certain partners must return property and records of the business;
- restraint and non-compete clauses; and
- non-disparagement and confidentiality clauses.
Dispute in a Two Partner Partnership
Disputes in a two-partner partnership can be complex and emotionally charged, particularly when one partner wishes to leave while the other wants to continue the business. The resolution process typically hinges on the terms outlined in the Partnership Deed, which should ideally include a dispute resolution mechanism. This document may specify procedures such as:
- mediation;
- arbitration; or
- a buyout process.
If one partner expresses a desire to exit, the first step is usually to refer to the Partnership Deed and follow its prescribed steps. However, in the absence of a comprehensive agreement or if the partners cannot reach a consensus, the situation can become more complicated. The departing partner may have the option to simply leave and be paid out their share of the business, but this can lead to further disputes over valuation and asset distribution. In some cases, the remaining partner might be required to buy out the leaving partner’s share at fair market value.
If an agreement cannot be reached, legal intervention may be necessary, potentially resulting in a court-ordered dissolution of the partnership. This process can be time-consuming, costly and potentially damaging to the business and personal relationships. To mitigate these risks, partners should consider including clear exit strategies and dispute resolution procedures in their initial agreement.
Ultimately, the goal should be to find a solution that respects both partners’ interests while preserving the value and continuity of the business, if possible. This might involve negotiating a phased exit, restructuring the partnership, or exploring alternative business arrangements that satisfy both parties’ objectives.
Key Takeaways
If you want to end a partnership or you are required to do so by law, you must ensure to:
- meet your obligations under your partnership agreement; and
- the law.
The idea of dissolving a partnership can seem overwhelming. However, it is important to ensure that you document the dissolution appropriately so that all parties can have peace of mind moving forward.
If you’d like assistance with dissolving your partnership or preparing a deed of dissolution, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A deed of dissolution documents how assets, liabilities and responsibilities are handled, preventing future disputes and ensuring a clear separation.
If partners cannot agree, the partnership deed should outline dispute resolution steps like mediation or arbitration. If no agreement is reached, legal action may be necessary.
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