If the partners decide to go their separate ways or if the partnership was founded for a limited duration that has ended, the partnership may dissolve. If one partner leaves a partnership, the other partners are able to continue business as usual, but technically a new partnership has been formed (assuming there are at least 2 partners left).
In this article, how to dissolve a partnership UK, we look at the process and mechanism involved.
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How do you dissolve a partnership if there is no formal partnership agreement?
The Partnership Act of 1890 will apply in the absence of a partnership agreement or if the agreement does not address dissolution.
According to the Act, a partnership is instantly dissolved if any of the following occur:
- A partner dies or declares bankruptcy.
- The court orders the dissolution of the partnership.
- It is prohibited to conduct business as a partnership.
- The partnership was formed for an agreed-upon fixed duration, which has now ended.
- The partnership was formed to accomplish a certain task or objective, and the project is complete.
- A partner notifies the other partners of his or her intention to dissolve the partnership. The notice is effective immediately and no explanation is required.
How do you dissolve a partnership if there is a partnership agreement in place?
If the partners have a partnership agreement, they may specify in the contract the conditions under which they intend to dissolve the partnership. Additionally, they can define how the business will continue if a partner leaves, dies, or declares bankruptcy. A partnership agreement allows the procedure to be specified precisely and reduces the probability of conflicts.
Under what circumstances can you terminate a partnership agreement?
There are a number of circumstances under which you can terminate a partnership agreement and they can include:
If one of the partners dies.
The partnership arrangement ceases immediately upon the death of a partner, unless a supplemental agreement specifies otherwise. Consequently, partnerships should have a written partnership agreement with provisions allowing the relationship to continue.
If there is no written partnership agreement and the remaining partners wish to continue the partnership, the Partnership Act is highly onerous.
If the business is a Limited Liability Company (Ltd.) or a Limited Liability Partnership (LLP), the death of a member does not automatically result in its dissolution.
By mutual agreement.
The majority of partnership agreements will include terms and processes for dissolving the partnership. The partners must adhere to the agreement, which typically stipulates that a vote of less than 100 percent is necessary to dissolve the partnership. If no such clause exists, all partners must simultaneously and unanimously agree to dissolve the partnership.
This implies that the partnership cannot be terminated by mutual consent if the partners previously consented but later change their minds.
By expiration
If the partnership was created for a particular project, or fixed period, the partnership is dissolved when the objective has been achieved.
For Limited companies, this does not apply. The shareholders vote to have Companies House strike off the register of members. LLPs have a similar process.
By Court ruling.
It is likely that dissolution by the court is likely to be contentious, otherwise the partnership would dissolve by agreement. The court can dissolve a partnership on several grounds, including that dissolution is just and equitable, because e.g.:
- The partnership comprises only 2 partners, who have fallen out
- The business can only be carried on at a loss
Termination by notice
If the partnership is a partnership “at will”, any partner can dissolve the partnership “by notice”. However, it takes very little for a partnership not to be “at will”. The relevant law is complex. Ways to establish the partnership is not “at will” include:
- Any indication the remaining partners intended to continue the partnership if one partner leaves
- A written partnership agreement
- The partnership is an LLP
It should be remembered that the concept of termination “at will” does not exist with companies. Instead, shareholders vote to wind up the business.
What to do next if you definitely want to exit the business?
If you have sat down with your business partner to discuss the issues with courtesy and candour and are still unable to see a way ahead, it may be time for you to quit the company.
In such circumstances, the most common method of exit is to have the company evaluated to assess the worth of your interest. The remaining partner would then be given the opportunity to purchase your shares. If he or she cannot afford to purchase them, they may be offered to other parties; however, provisions for this may be included in the shareholders’ and/or partnership agreement.
If your business partner is unable or unwilling to buy you out, and the firm can continue in different ways, it may be possible to separate the company’s interests. This might then lead to the foundation of two new businesses where each partner owns 100 percent of the shares. This method is only viable in a certain number of industries, as it may be difficult to make clear differences between all aspects of the business and sharing the customers.
When a company’s division requires the negotiation of intellectual property rights, this must be reflected in the financial settlement. Either the rights are assigned to a single business as a separate entity, or you may agree to pay your former business partner a royalty based on future income from their share of the intellectual property.
The practicalities if you can’t agree
If you have exhausted all attempts at resolving any disputes and you can’t come to a sensible compromise as to how an exit would work, the way forward is by closing down the company, paying off all outstanding loans and debts and distributing any remaining profit if any. Reference to your partnership agreement and shareholders agreement along with reference to your articles of association will provide guidance for this mechanism. It is at these moments that the importance of having these documents carefully drafted in the first place becomes apparent.
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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