If you own a business where multiple parties are involved, it is best to be prepared for a situation where a party or parties want to leave the business.

The consequences of a business partner leaving will depend on the business structure you have: company or partnership.

Partnership

A partnership can constitute two or more parties. The Partnership Agreement that initially created the partnership usually outlines the process to follow if a business partner would like to leave. Many partnerships may not have a formal agreement drafted. If this were the case, it would be necessary for the partners to adhere to the partnership legislation in their state or territory. Legislation usually requires a written notice from the departing business partner.

Once a business partner leaves, the partnership may be considered dissolved or technically dissolved. If a partnership is technically dissolved, the business can continue operating as a reconstituted partnership. Technical dissolution can arise when the existing and new partner(s) take over the assets and liabilities of the partnership with no apparent break to the running of the business. Technical dissolution may require that:

  • at least one partner remain a party to the partnership before and after one partner has left;
  • there is no period where there is only one partner.

It is common for a Partnership Agreement to include an express or implied continuity clause. Technical dissolution means that the business can continue running without the need for a new Australian business number (ABN).

If the departure of a business partner amounted to a dissolution, the business would need to follow the procedure in the Partnership Agreement or legislation to appropriately dissolve the partnership. A Deed of Dissolution is often drafted to outline the agreed terms of the dissolution.

Company

For proprietary companies, business partners are called members or shareholders. As a company has its own legal entity, if a business partner wants to leave the business they can do so with the company still able to continue operation. There are certain requirements involved if a shareholder would like to leave, including the requirement to notify the Australian Securities and Investment Commission (ASIC) of any changes to the shareholder composition of the company. The Shareholders Agreement usually outlines the process at which a shareholder can leave the company. The Share Buy-Back process involves the company reclaiming the shares by purchasing them from the shareholder who would like to leave. The shareholder can also sell their shares, however, approval of the incoming shareholder may be required from existing shareholders.

The common documents cited when a business partner wants to leave a business is either a Partnership Agreement or Shareholders Agreement. Alongside these agreements, you will need to ensure that the you have followed the appropriate legislative procedures, such as notifying ASIC of any changes or applying for a new ABN. Each situation varies, and it would be important to speak to a qualified commercial lawyer to guide you through the process.

Conclusion

At LegalVision we have specialist commercial lawyers who can assist in drafting the appropriate agreements to ensure you are prepared for any future outcome of your business.

Ursula Hogben

Ask Ursula a Question

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.