The Advantages of a Dissolution of Partnership Agreement

By Timothy James

A general partnership is an entity allowing two or more persons to jointly conduct business for profit. The laws of each state authorize partnerships and, together with the written agreement between the parties, govern their terms. Partnership laws vary, but most states derive their partnership laws from the Uniform Partnership Act. A dissolution agreement can afford partners many important advantages if done properly and under the right set of circumstances.

A general partnership is an entity allowing two or more persons to jointly conduct business for profit. The laws of each state authorize partnerships and, together with the written agreement between the parties, govern their terms. Partnership laws vary, but most states derive their partnership laws from the Uniform Partnership Act. A dissolution agreement can afford partners many important advantages if done properly and under the right set of circumstances.

Dissolving a Partnership

Partners who no longer wish to do business can create a dissolution of partnership agreement. A dissolution of partnership agreement details the terms under which the partnership will terminate. Often, it is written only after lengthy negotiations, sometimes with attorneys present. Though generally recommended, partners need not wind up their affairs using a dissolution agreement since having a dissolution agreement is optional rather than mandatory.

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Avoiding Default State Laws

State laws typically provide default procedures for dissolving a partnership. When partners wind up their affairs using a dissolution agreement, they can set their own terms rather than rely on default statutory terms provided by their state. This allows partners to create terms that better fit their particular situation than a state's default rules.

Assigning Outstanding Debts

A written dissolution of partnership agreement allows partners to address any debts that might survive the partnership, agree on the distribution of remaining assets and address any other remaining issues. The agreement can also later serve as evidence that a partner agreed to retire a particular partnership obligation as well as award a partner the right to claim a particular asset, including the right to continue to do business under the auspices of the former partnership.

Enforcing Rights in Court

Because it is a legally enforceable contract, partners can enforce the terms of a written dissolution of partnership agreement in court. This is the main advantage of having a dissolution agreement: Furthermore, a clearly worded dissolution agreement can help avoid misunderstandings. However, if misunderstandings occur, partners may enforce their rights through litigation, filing suit in the proper court within the state where the partnership was created.

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How to Change Ownership From a Proprietorship to a Partnership

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Canceling a Partnership Agreement

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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Many businesses that want the benefits of corporations without the complex tax rules and expensive startup costs involved with that type of entity choose to form as a limited liability company, or LLC, or a limited liability partnership, or LLP. Potential business owners must weigh the pros and cons of each structure when deciding which is better for their company. While LLC legislation is widespread, not all states have LLP laws.

Dissolving Limited Partnerships

The laws of each state govern the creation and dissolution requirements of limited partnerships that operate within its jurisdiction. However, 18 states and the District of Columbia follow the Uniform Limited Partnership Act of 2001, thereby creating some uniformity in partnership dissolution rules. If the limited partnership you’re dissolving operates in a different state, the rules are fairly similar but differences may exist. Be sure to research the laws of your own state.

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