The Transfer and Termination of a General Partnership

By David Carnes

A general partnership is automatically created under state law whenever two people or entities agree to do business together and share profits and losses. The terms of the transfer of partnership interests or the termination of a partnership are determined by state law and the provisions of the partnership agreement, if any.

A general partnership is automatically created under state law whenever two people or entities agree to do business together and share profits and losses. The terms of the transfer of partnership interests or the termination of a partnership are determined by state law and the provisions of the partnership agreement, if any.

Transfers of Interest

A partner's interest in a general partnership represents his right to share in a certain proportion of partnership profits, losses and distributions. Under state law, an interest in a general partnership is freely transferable unless a partnership agreement restricts transfers of interest. When the transfer of an interest in a general partnership results in a change of membership in the partnership, state law treats the partnership as automatically dissolved in favor of a new partnership, although the new partnership is still entitled to continue partnership business. Most partnership agreements contain transfer restrictions. Among the most common restriction is the right of first refusal. Under a right of first refusal, a partner may transfer his interest to an outside party only if he offers his interest to each of the other partners first, on terms at least as favorable as the terms he offered to the outside party, and each of the partners refuses the offer.

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Sale of Assets

If all partners wish to withdraw from a general partnership, they can simply sell partnership assets to an outside party and use the proceeds to satisfy partnership creditors. This outside party may be another partnership, an individual, a corporation, an LLC or a trust. The problem with transferring the entire assets of a partnership, however, is that it is difficult to transfer goodwill -- the economic value of the partnership's business reputation -- if all of the partners who created the goodwill are withdrawing from the partnership.

Dissolution

State law regulates the dissolution of general partnerships. Some of these laws are mandatory, and some apply only in the absence of a relevant provision in a partnership agreement. Under the Uniform Partnership Act, enacted by a majority of states, in the absence of a partnership agreement all partners share profits and losses equally. Regardless of whether or not a partnership agreement exists, a partnership that has dissolved and is in the process of distributing its assets must satisfy partnership creditors first, and must distribute any excess property to the partners in proportion to their respective interests in the partnership.

Liability

Dissolution of a partnership and distribution of its assets doesn't necessarily relieve partners of liability. Even if the partnership no longer owns assets and is no longer doing business, partnership creditors may sue individual partners for partnership debts and satisfy any judgment out of the partners' personal assets. Since any partner has the right to bind the entire partnership to a debt obligation, a partnership creditor can even sue one partner for a debt obligation undertaken by another partner in the name of the partnership. The partnership can terminate the right of any partner to further bind the partnership by publishing public notice of its dissolution and termination of business operations in the manner required by state law.

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References

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