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Breaking Ties: The Essentials of the Dissolution of a Business Partnership

Author: Christopher D. Warren|March 13, 2024

Key Steps to the Dissolution of a Business Partnership

Breaking Ties: The Essentials of the Dissolution of a Business Partnership

Key Steps to the Dissolution of a Business Partnership

The Dissolution of a Business Partnership displayed by a broken rope.

The dissolution of a business partnership is not as simple as shutting the doors. Just like when launching a new business, there is a legal process that must be followed to ensure that you and your business don’t face unintended liability.

In addition to reaching an agreement between partners to wind down the partnership, other important issues to address may include liquidating your assets, terminating your lease and/or selling your commercial property, resolving outstanding liabilities, canceling contracts, and notifying customers, employees, vendors, and other business partners that you plan to close. Because failing to dissolve your New York or New Jersey partnership properly can lead to significant legal issues, we always advise consulting with an experienced partnership attorney.

Navigating the partnership dissolution process is a lot easier with a clear roadmap in place. In many cases, your existing partnership agreement will establish the procedures for dissolving the partnership or at least give you a good starting point. For instance, the dissolution provisions in your partnership agreement may address the events triggering dissolution, the rights of each party upon dissolution of the business, the methodology for valuing the business and each partner’s interest, and other key issues.

Even with a partnership agreement in place, it is always wise to work with an experienced partnership lawyer to draft a comprehensive dissolution agreement. Having a written agreement in place helps ensure everyone is on the same page, reduces the risk of disputes, and helps shield you from liability.

Legal Insights and Practical Guidelines

Once you have a business partnership dissolution agreement in place, the process of actually winding down the partnership begins. This typically involves:

  • Examining Existing Contracts: The dissolution of a business partnership will likely impact your contract partners, such as your landlord, lenders, customers, and vendors. You should examine your leases, loan agreements, and other contracts to determine your obligations upon dissolution of the partnership. In many cases, you may be required to provide notice and/or honor the contract for a specified period. In other cases, the dissolution of the partnership may automatically void the contract.
  • Paying All Outstanding Liabilities: Before closing the business, the partners must notify all creditors and make arrangements to settle or pay all outstanding debts. Many states, including New York, have partnership laws outlining the order in which creditors must be paid.
  • Cancelling All Business Licenses: Partners should be sure to terminate any business registrations, licenses, and permits.
  • Satisfying Final Tax Obligations: For partnerships with employees, it is imperative to ensure that all payroll tax deposits are made and all employment tax paperwork is completed. You should also notify local, state, and federal tax agencies about the dissolution of your business.
  • Providing Notification of Dissolution: While not always legally required, partners should provide notice of the dissolution to all of the partnership’s business associates, including suppliers, vendors, customers, and clients.
  • Completing Dissolution Filings Required Under State Law: State laws regarding partnership dissolution vary. In New Jersey and New York, general partnerships do not need to file any formal dissolution paperwork when closing a business, but limited partnerships and limited liability partnerships do. All businesses are required to cancel their tax registration with the state.
  • Planning for Ongoing Recordkeeping Obligations: Even though the partnership is dissolved, business records must still be retained for several years. The partners should designate who will take this responsibility, whether it’s a partner or a third party.

Failing to take the proper steps in the dissolution of a business partnership will almost always lead to legal headaches, whether it’s a disagreement between partners over the distribution of profits or an action by the Internal Revenue Service for unpaid taxes. As a result, many businesses seek the assistance of experienced professionals, such as accountants and business attorneys, who are familiar with the process. This helps ensure that all of the required steps are completed to officially dissolve the partnership and avoid any unforeseen future liability. The attorneys of Scarinci Hollenbeck’s Partnerships Practice Group provide experienced counsel to New York and New Jersey partnerships of all sizes in a wide variety of industries. Whether you are looking to form, grow, or dissolve your partnership, our team will guide you through the process and develop a strategy that advances both your business and legal interests.

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Breaking Ties: The Essentials of the Dissolution of a Business Partnership

Author: Christopher D. Warren
The Dissolution of a Business Partnership displayed by a broken rope.

The dissolution of a business partnership is not as simple as shutting the doors. Just like when launching a new business, there is a legal process that must be followed to ensure that you and your business don’t face unintended liability.

In addition to reaching an agreement between partners to wind down the partnership, other important issues to address may include liquidating your assets, terminating your lease and/or selling your commercial property, resolving outstanding liabilities, canceling contracts, and notifying customers, employees, vendors, and other business partners that you plan to close. Because failing to dissolve your New York or New Jersey partnership properly can lead to significant legal issues, we always advise consulting with an experienced partnership attorney.

Navigating the partnership dissolution process is a lot easier with a clear roadmap in place. In many cases, your existing partnership agreement will establish the procedures for dissolving the partnership or at least give you a good starting point. For instance, the dissolution provisions in your partnership agreement may address the events triggering dissolution, the rights of each party upon dissolution of the business, the methodology for valuing the business and each partner’s interest, and other key issues.

Even with a partnership agreement in place, it is always wise to work with an experienced partnership lawyer to draft a comprehensive dissolution agreement. Having a written agreement in place helps ensure everyone is on the same page, reduces the risk of disputes, and helps shield you from liability.

Legal Insights and Practical Guidelines

Once you have a business partnership dissolution agreement in place, the process of actually winding down the partnership begins. This typically involves:

  • Examining Existing Contracts: The dissolution of a business partnership will likely impact your contract partners, such as your landlord, lenders, customers, and vendors. You should examine your leases, loan agreements, and other contracts to determine your obligations upon dissolution of the partnership. In many cases, you may be required to provide notice and/or honor the contract for a specified period. In other cases, the dissolution of the partnership may automatically void the contract.
  • Paying All Outstanding Liabilities: Before closing the business, the partners must notify all creditors and make arrangements to settle or pay all outstanding debts. Many states, including New York, have partnership laws outlining the order in which creditors must be paid.
  • Cancelling All Business Licenses: Partners should be sure to terminate any business registrations, licenses, and permits.
  • Satisfying Final Tax Obligations: For partnerships with employees, it is imperative to ensure that all payroll tax deposits are made and all employment tax paperwork is completed. You should also notify local, state, and federal tax agencies about the dissolution of your business.
  • Providing Notification of Dissolution: While not always legally required, partners should provide notice of the dissolution to all of the partnership’s business associates, including suppliers, vendors, customers, and clients.
  • Completing Dissolution Filings Required Under State Law: State laws regarding partnership dissolution vary. In New Jersey and New York, general partnerships do not need to file any formal dissolution paperwork when closing a business, but limited partnerships and limited liability partnerships do. All businesses are required to cancel their tax registration with the state.
  • Planning for Ongoing Recordkeeping Obligations: Even though the partnership is dissolved, business records must still be retained for several years. The partners should designate who will take this responsibility, whether it’s a partner or a third party.

Failing to take the proper steps in the dissolution of a business partnership will almost always lead to legal headaches, whether it’s a disagreement between partners over the distribution of profits or an action by the Internal Revenue Service for unpaid taxes. As a result, many businesses seek the assistance of experienced professionals, such as accountants and business attorneys, who are familiar with the process. This helps ensure that all of the required steps are completed to officially dissolve the partnership and avoid any unforeseen future liability. The attorneys of Scarinci Hollenbeck’s Partnerships Practice Group provide experienced counsel to New York and New Jersey partnerships of all sizes in a wide variety of industries. Whether you are looking to form, grow, or dissolve your partnership, our team will guide you through the process and develop a strategy that advances both your business and legal interests.

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