A partnership forms when two or more people go into business together and agree to share the profits. Partnerships are relatively easy and inexpensive to set up but do not offer the same limited liability protection as other business structures like companies. This means that each partner is personally liable for the actions of other partners and any liabilities the partnership incurs. As a result, you may be looking to terminate your partnership in favour of a different business structure. This article explores how you can legally terminate a partnership.
Reasons to End a Partnership
Restructuring your business is one of many reasons you may need to terminate your partnership. Other reasons for ending a business partnership include:
- your partnership agreement includes a term that details when the partnership will expire;
- one partner gives written notice to the other partner to leave the partnership;
- one or both partners can no longer legally own the business;
- there is a court order to end the partnership;
- one of the partners dies; or
- the business is bankrupt or insolvent.
Terminating a Partnership With an Agreement
If you need to terminate your partnership, you should consult the partnership agreement as a first step. A well-written partnership agreement will usually include:
- how the business is run;
- how responsibilities are allocated;
- what happens if the parties disagree or there is a dispute; and
- what happens if the parties need to dissolve the partnership.
You should review the required steps to dissolve the partnership and ensure you carry them out properly. If a dispute caused the termination, the partnership agreement should also protect you against claims made against you personally. Partnership agreements may set out how the business can terminate at a particular time and will usually dictate the process for the distribution of the business’ assets.
If you terminate your partnership, you must notify all relevant bodies, including:
- customers;
- suppliers;
- local governments;
- the Australian Taxation Office; and
- your bank.
Terminating a Partnership Without an Agreement
You can still dissolve your partnership even if you do not have a partnership agreement, or your partnership agreement fails to adequately set out the steps for termination.
Where no partnership agreement is in place, relevant State or Territory partnership legislation will govern the partnership. Depending on where you are based, there may be different legal requirements to dissolve a partnership. For example, in New South Wales, the legislation:
- sets out the relationship between the partners;
- permits each partner to bind the partnership; and
- permits each partner to dissolve the partnership.
Under the law, partners may generally dissolve a partnership by:
- allowing the term of the agreement to expire; or
- one partner giving notice to the other of their intention to dissolve the partnership if no term is defined.
If the partner does not want to dissolve the partnership immediately, they should specify in the notice the date on which the partnership is to dissolve. A court order can terminate the partnership if the matter proceeds to court.
Common Consequences of Terminating a Partnership
You should be aware of some consequences when deciding whether to terminate your partnership.
Debt
Each partner will be jointly responsible for the business’ debts and obligations incurred while a partner.
Application of Partnership Property
Upon termination, partners can have the partnership’s property applied to the payment of debts and liabilities of the business. This right exists against other partners.
Tax Consequences
You should always consult your accountant when dissolving a partnership. This consultation is to ensure that you:
- are aware of any tax liabilities you may have under the partnership; and
- have the appropriate statements prepared for your tax return.
This is especially important if any of the partners sold assets of the partnership at any point in time while they were a partner.
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Key Takeaways
If you are thinking about terminating your partnership, the first thing you should do is refer to the partnership agreement. Ideally, the partnership agreement will set out everything you need to do to dissolve the partnership legally. If there is no partnership agreement in place, or it does not explain what you need to do when dissolving the partnership, the relevant legislation in your State or Territory will apply. Regardless of whether you are relying on the partnership agreement or the legislation, you should always:
- notify the relevant parties that the partnership is being terminated; and
- consider the tax, debt and property consequences of the termination.
If you need assistance drafting or reviewing your partnership agreement or terminating your partnership, 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 partnership forms when two or more people go into business together and agree to share the profits. Partnerships are relatively easy and inexpensive to set up.
If you have a partnership agreement in place, ensure you follow the correct process to end your partnership. If not, or your partnership agreement is silent on this matter, relevant State or Territory legislation will apply.
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