How To Terminate A Partnership Agreement

The prospect of starting a new business venture with a partner can be exciting and also nerve-wracking. With the best intentions in the world, your combined talents and shared aspirations and goals seem like the perfect springboard from which to launch your business together. Sadly, however, sometimes the partnership doesn’t go as well as you had planned and it is at this point that you might have the realisation that you want to leave. In this article, how to terminate a partnership agreement, we look at the process and mechanism involved.

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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:

Death of one of the partners

Partnerships agreements will automatically terminate if any partner dies unless an agreement as to what should happen in this event was previously agreed upon. Consequently, partnerships should have a written partnership agreement, with provisions that permit the partnership to continue.

If there isn’t a written partnership agreement, and the remaining partners had intended the partnership to continue, the Partnership Act is rather cumbersome.

If the business trades as a Ltd company or an LLP, then the death of a member does not cause the business to automatically dissolve.

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 shareholder’s 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’ve sat down with your partner in an amicable and open way to discuss the issues and you still can’t see a way forward, it may well be time to exit the business.

Under these circumstances, the commonest way to leave is by having the business valued to see what your interest is worth. The remaining partner would then be offered your shares to buy. If he or she can’t afford to buy them, they can be offered to third parties but if you have a shareholders and/or partnership agreement in place, there might be provisions for this contained within the documents.

If your business partner either can’t afford to or doesn’t want to buy you out and the business is able to continue in different directions, it may be possible to divide the company’s interests. This could then create two new businesses whereby each partner owes 100% of the shares. The reality of this option is that it only really works in certain industries as it can be quite difficult to make clear distinctions on all aspects of the business and also customer share.

Where separating the business involves agreeing the rights to intellectual property it will be necessary to account for this in the financial settlement. Either the rights are assigned to one business as a separate entity, or you may agree to pay your former business partner a royalty based on future earnings from their share of ownership 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.

How we can help

We have a proven track-record of helping clients exit their business and terminate partnership agreements. 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.

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 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.

Authored by Ben Posted in Corporate, News Tagged as