Dissolving Legal Partnerships

by David Carnes
A legal partnership can result from a simple handshake.

A legal partnership can result from a simple handshake.

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A general partnership is automatically formed under state law whenever two or more persons or business entities agree to do business together and to share profits and losses. If no written partnership agreement is created, state default rules govern the terms of the partnership. States also allow general partnerships to obtain limited liability by filing documentation with the state government. Partners must follow certain procedures to dissolve a partnership without liability.

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Triggering Events

A two-party general partnership is automatically dissolved if one party quits the business. If a general partnership contains more than two parties, the departure of one partner automatically dissolves the partnership and creates a new partnership with the remaining partners. A partnership is also automatically dissolved if a partner dies or goes bankrupt, or if the partnership's business is made illegal. All partners can agree to stop doing business together, leaving the dissolving partnership with no successor entity.

Dealing with Third Parties

A departing partner must notify all interested parties that he is leaving the partnership. If he doesn't, he will remain as liable as the remaining partners for all partnership debts that arise after he leaves the partnership. Interested parties include partnership creditors, suppliers, customers and clients.

Distribution of Assets

Partnership assets should be distributed to departing partners when the partnership is dissolved. If there is a partnership agreement, its terms dictate how to apportion partnership assets among the members. If there is no partnership agreement, consult state default rules to apportion assets. Most states require partnerships to distribute assets in proportion to a departing partner's right to share profits -- if he is entitled to 30 percent of partnership profits, for example, he is entitled to 30 percent of partnership assets unless there is a partnership agreement that states otherwise.

Limited Liability Partnerships

The laws of the various states authorize the formation of several different types of partnerships -- limited partnerships, limited liability partnerships, master limited partnerships, for example -- that enjoy varying degrees of limited liability. Lawyers often organize as limited liability partnerships because this form of organization protects each partner from liability for legal malpractice committed by other partners. Filing documentation with the state governments always dissolves such partnerships. Required documentation varies according to the state and the type of partnership. Some states require general partnerships to file documentation with the state government.