Dissolution of a business partnership
There are many reasons for the dissolution of a business partnership. For example, one partner may have decided they want to leave the partnership to pursue other opportunities, or there may be a dispute about the direction the business is moving in. Or something may have occurred to automatically trigger a dissolution.
Whatever the circumstances, the dissolution may be more even complex if there isn’t a partnership agreement in place, so in this article, Stephanie Whitchurch, Partner and Head of Litigation from Tallents Solicitors explains the process of dissolution for standard partnerships.
What is a partnership and how is it formed?
A partnership is formed automatically as soon as two or more people are working together in business to make a profit.
Although not legally required, it makes good business sense to have a written Partnership Agreement drawn up, as otherwise, the partnership will be governed by the Partnership Act 1890 (The Act), and subject to legislation that was written more than 130 years ago.
The Act may trigger the automatic dissolution of the partnership if certain events occur, which we will look at shortly.
A written Partnership Agreement will provide a legal basis for decision making and will protect the interests of everyone involved in the business. It also has financial and tax planning benefits and can define the split of profits, amongst others. A solicitor can help you create the right Partnership Agreement for your business, which can include procedures to be followed if a partner leaves.
Ways of dissolving a business partnership
In the absence of a written Partnership Agreement, or where the Partnership Agreement in place didn’t include provisions to deal with dissolution, The Act will apply. Under The Act, there are several events which will trigger an automatic dissolution which include:
- A partner serves notice to dissolve the partnership, verbally or in writing,
- A partner dies or becomes bankrupt,
- The court orders the partnership to dissolve,
- It would be illegal to carry on the business of the partnership,
- The partnership was set up for a fixed period and that has now been reached,
- The partnership was set up to achieve a specific task, project or objective, which has now been completed.
If any of these occur, then the partnership is automatically dissolved and the business should cease trading while matters are settled and the business wound up. This can be very disruptive, may damage business relationships and can sometimes lead to disputes between the individuals involved.
Why you should have a written Partnership Agreement
Including provisions about dissolution within a written Partnership Agreement can reduce any potential disputes and provide that any partnership between remaining partners can remain in place and the business can continue trading without interruption.
Such provisions could include clarification on areas such as:
- How a partner can exit the partnership
- Who is liable for any debts or indemnities
- How assets will be divided up
- Who would take over the business
- Who owns any intellectual property (IP) rights
- What happens with regards to broken contracts
- Creation of final partnership accounts
- The termination of any banking arrangements
- Compliance with any statutory or professional obligations
- Any restrictive covenants and non-competition clauses
Partnership dissolution advice
If the relationship between partners has broken down it is usually best to try and negotiate the dissolution of the partnership. Negotiations may be more complicated and protracted if there is no existing written Partnership Agreement. If agreement cannot be reached, it might be necessary for the court to determine issues between the parties.
If agreement is reached after a relationship has broken down, the parties can enter into a Deed of Dissolution of Partnership which sets out what has been agreed and which will typically deal with the issues listed above. However, the position is likely to be clearer and there may be less scope for dispute if these issues have already been addressed in advance in a written Partnership Agreement.
The experienced lawyers at Tallents Solicitors can offer commercial legal advice to anyone thinking of setting up a business, going into or exiting a partnership, or who wishes to protect an existing business. Please call us on 01636 671881 to discuss your circumstances and arrange a confidential appointment.
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