Canceling a Partnership Agreement

by Anna Assad

You may end a partnership agreement for any reason including disagreements among the partners, or the need for a different type of business structure, such as a limited liability company, because of growth. Once you've decided to cancel a partnership agreement, you must take steps to limit your personal liability for the partnership's debts and the actions of your former partners.

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Procedure

You usually don't need the consent of your partner to cancel the partnership agreement. The agreement terms may include specific rules you must follow for cancellation and penalties for not following the rules; you may liable to your partner if you don't follow the cancellation procedure in your agreement. You also need to look at the terms of any leases, contracts or loans you signed with your partner. These agreements may have penalties if you dissolve the partnership while you'll still obligated by the agreement. A creditor, landlord or contract party may have the right to sue you if you end the partnership or if your partner defaults on the obligation, even if you send them notice of the partnership's end. Work with your partner to remove yourself from leases and contracts, or negotiate new terms with creditors so you don't have unexpected liability.

Third Party Notification

You may have the responsibility of notifying other parties affected by the partnership's termination if you're the partner initiating it, depending on your state's laws. You should notify all persons and companies with whom the partnership did business, such as customers, vendors and suppliers, of the end of the partnership in writing. Alerting these parties prevents problems; once you've notified them, they'll know you're not liable for future liabilities and debts of your former partner.

State Dissolution

Even if your state doesn't require it, you should formally dissolve the partnership as soon as you terminate the agreement if you've registered your partnership with the secretary of state. Formal dissolution may give you extra legal protection. For example, California law states that all third parties are considered to have knowledge that no partner has authority to enter into binding transactions on behalf of the partnership 90 days after the dissolution certificate is filed, even if the dissolving partner failed to notify a third party. Partnership dissolution procedures vary by state. You can file a partnership dissolution statement or certificate with the your state's secretary of state office; there are standard forms available. You may need to include a liquidation plan with the dissolution form. The plan shows the state how you're settling the partnership's debts and assets.

Considerations

Whether you need to notify federal and state tax agencies of the agreement cancellation and partnership dissolution depends on what type of property your partnership owned. If your partnership owns property that has gained value, for example, you may have tax consequences. Speak to a business attorney if you're unsure about the partnership's effect on taxes. Once you've removed yourself from the partnership, you can't take part in any of its business transactions except to wind down affairs. If you take part in a transaction for the partnership after cancelling the agreement and dissolving the partnership, and it has nothing to do with winding down business affairs, the other partners may sue you for any liability created because of your action.