What Does Dissolution Of Partnership Mean?

 

The dissolution of a partnership is the process during which the affairs of the partnership are wound up (where the ongoing nature of the partnership relation terminates). This is a different scenario than when applied to a limited company, which is the event that marks the conclusion of the winding-up of that company.

In this article, what does dissolution of partnership mean, we look at the process and mechanism involved.

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For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of a partnership dissolution, and once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start and also avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.

Dissolution of a partnership if there isn’t a formal partnership agreement

The Partnership Act of 1890 will rule 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 passes away or declares bankruptcy
  • The court orders the dissolution of the partnership.
  • It is unlawful to conduct the partnership’s activity.
  • It is unlawful to conduct the partnership’s activity.
  • The partnership was formed to accomplish a certain task or purpose, and the project is accomplished.
  • A partner notifies the other partners of their intention to dissolve the partnership. The notice is effective immediately and no explanation is required.

Dissolving a partnership if there is a formal partnership agreement in place

If the partners establish a partnership agreement, they could specify the circumstances 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. An agreement allows the procedure to be specified precisely and minimizes the chances of conflicts.

When can you terminate a partnership agreement?

There are a number of circumstances under which you can terminate a partnership agreement and they can include:

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 burdensome.

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

Most partnership agreements will include clauses and procedures for the partnership to be dissolved. The partners must comply with the agreement and often there is a clause in the partnership agreement that requires less than a 100% vote to dissolve the partnership. If there isn’t such a clause, then all partners, unanimously, and simultaneously, must agree to dissolve the partnership.

This means the partnership cannot be dissolved by agreement, if partners previously agreed but subsequently change their mind.

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 decision

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 fairness and openness 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 value 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 consumer share.

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 one business as a separate entity, or you agree to compensate your former business.

What happens if you can’t agree?

If you have exhausted all options for resolving disputes and are unable to reach a reasonable agreement on how an exit should occur, you must liquidate the company, pay off any outstanding loans and debts, and distribute any leftover profit, if any. This method will be guided by reference to your partnership agreement and shareholders agreement, as well as your articles of incorporation. At this point, the significance of having these documents meticulously produced in the first place becomes clear.

How we can help

We have a proven track-record of dealing with company set-ups and partnership dissolutions. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

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How to Contact our Corporate Solicitors

It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.

To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form . We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

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