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How to Dissolve a Partnership Agreement

Marci Martin
, writer
Jun 14, 2018
> Business Basics

Your solution will likely involve buying someone out or ending the business completely.

There are a few different agreements you may want to consider creating in relation to how to dissolve your business partnership or limited liability company.

Entering into a partnership business or limited liability company comes with many risks which, if not handled correctly, could result in the dissolution of a partnership. One or more of the partners could lose interest in the business and no longer feel committed to it, conflicts could come up which cannot be resolved, or the business venture could simply not work out.

Before you and your partner(s) entered into this business, though, chances are you signed a partnership agreement. As you are leaving the business, it is important to know how to properly dissolve a partnership agreement. That could lead to buying out another partner's shares or simply ending the business altogether.

"Without a partnership agreement, dissolving a partnership can get nasty and carry a lot of risk," small business owner Caron Beesley wrote in a blog for the SBA. "Even if you do have a partnership agreement, you are carrying an element of shared liability. Each partner is liable for the actions of the business, its debts, and of course, you also have to split profits."

There are many actions you can take which will end a business partnership and dissolve a partnership agreement.

Agree to Dissolve

If your partner(s) have lost interest but you have not, or vice versa, one partner can buy out the other partners' shares or you can sell your shares if you no longer want to be a partner in the business. Agreements can and should be put in place when creating the partnership to help protect you and your partners in this scenario.

Buy-Sell Agreements

A buy-sell agreement clearly lays out who can and cannot buy into the business should you or your partners decide to sell out, declare personal bankruptcy, or in the event of death, divorce or disability. With such an agreement in place, remaining partners in the business are protected against unwanted partners buying into the business or divorced spouses wanting a part of the business. It also will prevent emotions from getting in the way of making decisions.

New Dissolutions

Should you and your partner want to end the business venture all together, creating a partnership dissolution agreement can help you agree on the terms of dissolving the partnership – especially if the original written partnership agreement did not clearly lay out terms for ending the partnership. A dissolution agreement clearly specifies the duties of each partner, timelines for ending the partnership and roles each partner will play in the process. Creating a partnership dissolution agreement does not immediately end the partnership. You would still have time to settle any debts, legally end the business, and distribute any partnership assets and partnership property.

Statement of Dissolution

Once you and your partners have agreed on how the terms of dissolving in business and all dissolution proceedings have come to a close, you must file a statement of dissolution. The instructions for completing a statement of dissolution vary from state to state, so it is important to follow the format that is laid out for the state where your business is located. Some states require businesses to file a dissolution statement before notifying creditors and resolving claims while other states require the dissolution statement to be filed after. Tax clearance is also required by some states, meaning all back-taxes must be paid prior to filing a statement of dissolution.

Cause and Effect

Reaching the decision to dissolve is never easy, and the consequences of the action must be taken into consideration. Where everyone would like to end their business adventure on a positive note, sometimes the opposite holds true.

"When a partnership is dissolved, the partners can't simply take the partnership's money and property," says Stephen Fishman, JD, University of Southern California Law School. "Instead, the partnership's assets must be liquidated …, an accounting made, and the assets used to pay all outstanding partnership debts, including those owed to the partners."

Fishman noted that outside creditors must be paid first, and if anything is left, it is distributed to the partners.

"If the partnership doesn't have enough money or property to pay its debts, the individual partners will have to chip in and pay them from their own funds," he added.

For all of these reasons, it is always in the best interest of a business owner or firm to consult with an attorney or lawyer that specializes in commercial law, when dealing with business or partnership dissolutions. Knowing what to expect will give you greater decision-making power and the ability to move forward.

Marci Martin
Marci Martin
With an associate's degree in business management and nearly 20 years in senior management positions, Marci brings a real-life perspective to her articles about business and leadership. She began freelancing in 2012 and became a contributing writer for Business News Daily and in 2015.
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