You only need to consider John Lennon and Paul McCartney to know that even great partnerships end. This fact applies equally to the world of business. Business partnerships can end. Of course, the process for dissolving partnership can differ. If you are interested in how to dissolve a partnership, this article explains the mechanics of doing so.
The mechanics of dissolving a partnership typically depends on two factors:
- The Partnership Agreement; or
- The reason for ending the partnership.
In simple terms, a partnership agreement is a formal agreement made between individuals or entities that carry on a joint business venture. The agreement outlines the terms according to which the partnership is carried on. That is, it details the rights and obligations of the partners between themselves. Of course, all partnerships are subject to state or territory based legislation. For example, the Partnerships Act 1892 (NSW) governs all partnerships in NSW.
As a partnership is not a separate legal entity, partnerships can be a more fluid business structure. That means that should a new partner join, or a partner depart, the first partnership ends and a new one takes its place. In such circumstances, an agreement provides necessary clarity and guidance about the procedures to be followed.
If you would like to dissolve a partnership, your first port of call is the Partnership Agreement. Read it carefully to determine if it discusses how to dissolve the partnership. If it does, follow that process. However, even if the agreement clearly outlines the procedure, consult a legal professional. They can read the agreement and use their expertise to highlight any issues or factors that you had not considered. They can also guide you the process of ending the partnership.
Reasons to End a Partnership
However, partnerships are not required by law to have a written agreement outlining mutual obligations and rights. That is one of the reasons that partnerships are relatively cheap to set up in comparison to other business structures.
If the partnership that you would like to dissolve does not have an agreement, the process is determined by the relevant state or territory legislation. And that process, in turn, depends on the reasons why a partnership is ending.
While the various state and territory statutes differ somewhat, generally speaking, partnerships end when:
- The partnership term has expired, or business venture has come to an end;
- A partner wishes to leave;
- An event makes the partnership illegal;
- A partner becomes bankrupt or dies;
- The court dissolves a partnership due to incapacity or unsoundness of mind.
It is also open to partners to dissolve a partnership if a partner places their share of the partnership under a charge in satisfaction of a separate debt.
How to Dissolve a Partnership
To dissolve a partnership, a partner wishing to leave must usually give written notice to all the other partners making known their intention. If the partner does not specify a date, the time of dissolution is the date on which the partner communicates the notice.
If a partnership term has expired or business venture has ended, the partnership automatically ends at that time. Of course, this is usually specified in a formal agreement.
Similarly, the bankruptcy or death of a partner also automatically ends a partnership from the date of bankruptcy or death. If an event occurs which renders a partnership illegal, the partnership is dissolved at the time the event occurs.
In cases of incapacity or unsoundness of mind, a partner must apply to the court for an order to dissolve the partnership. However, as concerns unsoundness of mind, the partner in question must have been formally declared unsound in mind. If they have been so, the application can be made by that partner’s next friend or committee as well as by another partner.
The dissolution of a partnership is typically the start of extensive paperwork to meet all legal and financial obligations. That includes completing income tax returns, calculating and paying the tax owed for any capital gains as well as ensuring that the financial records for the partnership are complete and correct. Any employees of the partnership must all receive all their entitlements and superannuation contributions. Owing to the complexity of the task, professional legal and financial advice is essential. Expert advice and assistance could very well prevent difficulties later. Contact LegalVision’s business lawyers to assist you. Questions? Call us on 1300 544 755.