A partnership is the default form for businesses that are formed by two or more persons for profit. A partnership may be created by an oral or written agreement. Although a partnership may be straightforward to create, and may even be created inadvertently, disbanding a partnership may take some planning. A partner can always dissolve a partnership unilaterally, but doing so may have financial consequences. Once a partner expresses the intent to dissolve a partnership, the other partners may have to wind up the finances or, in some states, buy out the dissociating partner.
Causes of Dissociation
There are a number of permissible grounds under which a partnership can be dissolved. A majority of partnerships are called partnerships-at-will, meaning that the partnership continues until at least one partner notifies the partnership that she intends to withdraw. Partnerships that continue only for a specific period of time are sometimes referred to as "term partnerships." Generally, a partner can rightfully withdraw from a term partnership if all of the partners agree to terminate the partnership; the goal of the partnership is accomplished; an event in the partnership agreement occurs that automatically triggers dissociation; or some event occurs after the partnership is formed that outlaws the intended purpose of the partnership. The death, incapacity or bankruptcy filing of one partner may also constitute grounds for dissolving a partnership. Finally, a partnership may be properly dissolved by court order.
It is important to note that the ability to disband a partnership is different than the legal right to do so. A partnership can be dissolved by wrongful conduct. For example, if a partnership agreement provides that the partnership will last for one year, and if one partner expresses his intent to terminate his interest in the partnership prior to the expiration of that one-year period, the partnership is dissolved. In this scenario, although the partnership is dissolved, the wrongful actions may give rise to damages owed to the other partners.
Once the intent to disband the partnership exists, state law may require the partners to go through a process called winding up. If winding up is required, the partners must first determine the value and extent of the partnership’s assets. The partners must then determine the extent of the partnership’s liabilities, if any. If the partnership does have liabilities, the partners must pay off those liabilities. Any remaining assets are then distributed equally among the partners, unless a partnership agreement provides for a different allocation. In the absence of a partnership agreement, all partners must share in the assets and liabilities equally. Unlike with corporations and limited liability companies, there is no paperwork to file or notice to give with a governmental entity. Until the winding up process has concluded, the partners still owe a duty of loyalty and good faith to the other partners.
Buyout as an Alternative to Winding Up
Those states that do not require the winding up process may instead provide for a buyout as an alternative. In these states, a buyout does not terminate the partnership with respect to the remaining partners, and the partnership may continue. A buyout, in this context, means that the remaining partners pay the dissociating partner her partnership interest. The partners may not offer a buyout if the dissociating partner dissociated before the expiration of a term partnership until either that term has expired or the goal of the partnership can been accomplished.