Partnership Dissolution: Steps, Legal Requirements, and Best Practices

Partnership Dissolution: Steps, Legal Requirements, and Best Practices

Deciding to end a business partnership is rarely an easy decision. After all, you have likely poured significant time and money into the venture. The partnership dissolution process can also be challenging, particularly if you and your partner don’t see eye to eye.

To minimize legal headaches when terminating a partnership, it is imperative to complete all of the necessary legal requirements, as well as follow best practices, such as keeping the lines of communication open. Working with a partnership attorney can also help ensure that you have completed all the proper steps and addressed any potential liability risks.

Partnership Dissolution Steps

Dissolving a partnership is a multi-step process. While every business is unique, the partnership dissolution process generally involves the following steps:

1. Checking your partnership agreement: If you and your partner(s) have a partnership agreement and/or operating agreement, it should detail the circumstances under which the partnership can be dissolved and outline the dissolution process. Key provisions to review include: what can trigger a dissolution; the terms under which one partner can buy out a departing partner; how partnership interests will be valued; and the rights and obligations of the partners during the dissolution process.
2. Meeting with your partners: Once you have decided to dissolve your partnership, you should notify your partner(s). Your partnership agreement or operating agreement should lay out how to authorize the dissolution, i.e. by vote or by written consent of the partners. The next step is to reach an agreement on key issues, such as buy-outs, dissolution timelines, partner duties, and asset liquidation.
3. Executing a dissolution agreement: Once you have reached a consensus on how the dissolution will proceed, you and your partner(s) should enter into a separate dissolution agreement that precisely defines the terms of the partnership termination. Having the agreement in writing not only provides a clear roadmap but also helps avoid disputes.
4. Informing customers, vendors, and other third parties: To preserve your relationships with clients, customers, suppliers, and others, you should inform them of your plans for the business. You may also need to negotiate how you plan to fulfill ongoing contractual obligations and/or terminate existing contracts.
5. Resolving liabilities and distributing assets: Upon dissolution, partnerships often have significant tangible and intangible assets, including inventory, equipment, and intellectual property, that must be distributed or sold. Partnerships must also terminate all existing contracts and resolve any outstanding debts. Once all financial liabilities are satisfied, any outstanding funds must be dispersed to the partners.

Partnership Dissolution Legal Requirements

Partnership dissolution requirements vary from state to state. Some states require partnerships to file a notice of dissolution with the state. Others require partnerships to publish a public notice in the local newspaper. To ensure you have checked all the necessary boxes, it is important to check the partnership laws of your local jurisdiction.

In New York, general partnerships aren’t required to file any paperwork with the New York Department of State upon dissolution. However, other types of partnerships do have filing requirements. For instance, within 90 days following the dissolution and the commencement of winding up the limited partnership, or at any time there are no limited partners, a domestic limited partnership must file a Certificate of Cancellation pursuant to Section 121-203 of the New York State Revised Limited Partnership Act.

No matter where your partnership operates, you must verify that you have paid any outstanding taxes. Depending on the nature of your business, this may include income, employment, and sales tax returns. Partnerships should also be sure to terminate any business registrations, licenses, and permits.

Partnership Dissolution Best Practices

There are certain best practices that can help the partnership dissolution process proceed more smoothly. First and foremost, it is essential to communicate with your partner(s). Setting clear expectations can help avoid disputes and preserve your relationship once your business closes its doors.

If you and your partner are not terminating the partnership on good terms, an experienced partnership attorney can help you negotiate the myriad of issues that must be resolved during the dissolution process. In some cases, your attorney may recommend that the parties work with a mediator who can help reach an amicable resolution without the need for protracted litigation.

Another best practice is to execute a separate partnership dissolution agreement. A partnership dissolution agreement is a legal contract between two or more partners under which they agree to end their business partnership. Executing a partnership dissolution agreement does not immediately terminate the business, but rather outlines the process for winding down the business and establishes the rights and obligations of each partner. For example, following the dissolution of a partnership agreement, a partner can no longer bind any of the other partners into a business transaction without their consent.

While a partnership dissolution agreement is not legally required, it is certainly recommended. Negotiating key issues, reducing them to writing, and executing a formal agreement is one of the best ways to reduce the risk of costly disagreements in the dissolution process.

Let Our Attorneys Walk You Through the Partnership Dissolution Process

The attorneys of Scarinci Hollenbeck’s Partnerships Practice Group provide experienced counsel to New York and New Jersey partnerships. We know that the partnership dissolution process can be stressful and time-consuming. Our goal is to help our clients make the process as seamless as possible while preserving your assets and protecting your legal rights.