Dissolution of a business partnership largely depends on the type of partnership in question. There are three types of partnerships, namely general, limited, and limited liability partnerships.
Dissolving a General Partnership (No agreement)
What is general partnership?
- General partnership is the most basic legal form of partnership available. For general partnership to exist there need to be at least two people running a ‘for profit’ business. General partnerships do not offer protection against personal liabilities. Therefore, each partner is responsible for the debts of the entire partnership.
How to dissolve a general partnership?
- Dissolution of a general partnership can occur in a number of ways. Dissolution can be agreed between the partners (although, it is not required for all partners to agree and only one partner can trigger the dissolution), ordered by the court of relevant jurisdiction or triggered by one of specific events. Such event could for instance be death of a partner in general partnership. Also in the case of partnerships with no agreement in place, partnership dissolution occurs when one partner decides to leave the partnership. Therefore, any disputes in general partnerships can be fatal to it.
Are there any potential consequences?
- Dissolving a partnership also involves a number of liabilities and obligations. In the case of general dissolution, partners will need to ensure that the process is handled diligently. All partnership’s assets will need to be collected and any financial liabilities cleared. If the remaining partners intend to stay in business, they will quite likely need to set up an identical partnership to take over the business affairs of the old partnership.
Dissolving a limited partnership
Dissolution of a limited partnership can be initiated by the general partners.There are some differences between dissolution of a general partnership and limited partnership.
When dissolution of a limited partnership is not possible?
- Limited partnerships cannot be dissolved in the case of following circumstances:
- a limited partner serving a notice of intention to dissolve – this can only happen if there is a prior agreement between the partners.
- when a limited partner offers his share in the partnership as security for debt finance – this can only happen if there is a prior agreement between the partners.
- when a limited partner dies or goes bankrupt.
- when a limited partner is considered not to be mentally capable.
Dissolving a partnership with agreement in place
Having spoken about various dissolution ‘trigger events’, that can occur with no partnership agreement in place, it is worth to consider how dissolution can be achieved when partners are legally bound by the agreement.
- Firstly, if the other partners intend to stay in business and continue trading, you must ensure that when you leave you discharge all of your responsibilities in full. It would be a breach of partnership agreement and a duty of care to leave the other partners with liabilities that they could not meet themselves without you.
- Secondly, the agreement will likely stipulate specific valuation processes to be used to determine value of the partnership upon dissolution. Based on the valuation, you should negotiate the best deal possible for yourself.
- Finally, the procedure for termination of the partnership agreement and therefore dissolution of the partnership should be included in the agreement itself. If it is not dissolving a partnership is as easy as serving a notice on the other partners and informing all those that are doing business with the partnership.
Importantly, before dissolving a partnership, partners should transfer assets that are in the name of the partnership. The reason behind this is simple. All assets that remain property of the partnership when it is formally dissolved become what is known as bona vacantia. In other words, they become ownerless property and as such belong to the Crown. The Treasury Solicitor is responsible for dealing with the collection of assets from dissolved companies and limited liability partnerships. Property in this context includes cash, leaseholds, freeholds, and any goodwill such as intellectual property.
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