How to Dissolve a Partnership Agreement

When you're starting out in a business partnership, it's easy to get swept up in the possibilities of your new venture and overlook the possibility – and legal ramifications – that the partnership may not work out. 

Entering into a business partnership or limited liability company comes with many risks, and if those risks aren't handled correctly, it could result in the dissolution of a partnership, tarnished relationships, and, potentially, lawsuits. 

It's important to have a signed partnership agreement in place before you go into business with other individuals – even if those partners are close friends whom you trust. It's also imperative to know how to properly dissolve a partnership agreement in the event one or more of the partners loses interest in the business, if conflicts arise that can't be resolved, or the business venture simply doesn't work out.

The process of dissolving your partnership

Although the process of dissolving your partnership isn't as simple as ceasing operations and closing up shop, it doesn't have to be overly complicated either. 

When a partnership dissolves, the individuals involved are no longer partners in a legal sense, but the partnership continues until the business's debts are settled, the legal existence of the business is terminated and the remaining assets of the company have been distributed. 

These, according to FindLaw, are the five steps to take when dissolving your partnership: 

1. Review Your Partnership Agreement. If you and/or your partner(s) decide to end the partnership, you need to review the legal agreement to ensure you follow the protocol outlined in the document for dissolving the partnership. Usually, there's a requirement in the agreement for some sort of majority vote to dissolve the business.
2. Discuss the Decision to Dissolve With Your Partner(s). You started your business with your partner(s), and you should have a candid discussion with them about dissolving it. You and your partner need to discuss obligations, such as the business's debts and future liabilities, and how you plan to wind down the business.
3. File a Dissolution Form. You'll need to file a dissolution of partnership form with the state your business is based in to formally announce the end of the partnership. Doing so makes it clear that you are no longer in a partnership or liable for its debts; it's a good protective measure to take.
4. Notify Others. Advise other parties of the dissolution, including employees, customers, the landlord and any government entities, including the IRS, that have registered your business or issued a license.
5. Settle and close out all accounts. Notify your creditors, too, of the dissolution. You'll want to ensure that all of your debts are paid. Close all business bank accounts. Next, distribute all assets following the partnership agreement or based upon whatever agreement you have with your partners. If there aren't enough funds to pay the partnership's debts and liabilities, seek legal advice from a business attorney.

Tip: To ensure you're upholding your legal obligations and that you've taken all the necessary steps, you may want to consult with an experienced business lawyer to help you navigate your way through the state-specific rules for dissolution.

Can a dissolved partnership be sued?

Yes, even though the partnership is dissolved, you and your partner(s) can be sued during and after the dissolution process under certain circumstances.

If your general partnership entered into contracts with other individuals or businesses, you and your partners can still be held liable after dissolution. If those contracts don't include terms that absolve you and your partners of a breach if the partnership is dissolved, your partnership as a whole (or each individual partner) can be sued even after dissolution.

Types of dissolution agreements

There are a few different agreements you want in place that govern how your business partnership or limited liability company can be dissolved without creating additional acrimony among the partners.

Agree to dissolve

If your partner(s) has lost interest, but you have not (or vice versa), as a partner, you can buy out the other partner's (or partners') shares.

Buy-sell agreements

A buy-sell agreement clearly spells out who can and cannot buy into the business should you or your partners 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.

New dissolutions

Should you and your partner want to mutually end the business venture altogether, a partnership dissolution agreement can help you agree on the terms of dissolving the partnership.  A dissolution agreement specifies the duties of each partner, and it establishes timelines for ending the partnership and the roles each partner will play in the process. Entering into a partnership dissolution agreement does not immediately end the partnership. You still have to settle debts, legally end the business and distribute any assets of the partnership.

Statement of dissolution

Once you and your partners agree on the terms of dissolving your company and all dissolution proceedings have ended, you then must file a statement of dissolution. The instructions for completing a statement of dissolution vary from state to state. You might also be required to pay any back taxes at the time you file a statement of dissolution. The IRS also has a checklist of to-dos.

Cause and effect

Deciding to end a partnership is never easy, and to further complicate matters, there are a lot of steps involved in dissolving one. 

"When a partnership is dissolved, the partners can't simply take the partnership's money and property," said Stephen Fishman, an attorney and author of several books and guides on business law.  "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 notes 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. 

It is always in the best interests of a business owner to consult with an attorney who specializes in commercial law when dealing with business or partnership dissolutions. Knowing what to expect can give you greater decision-making power and the ability to move forward confidently and with peace of mind.