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.

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.

Ready to start your LLC? Start an LLC Online Now

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.

Ready to start your LLC? Start an LLC Online Now
South Carolina LLP Laws
 

References

Related articles

Details of a Partnership Agreement

Although state laws do not require partnership agreements, a partnership agreement can provide a solid legal foundation for your business venture. Even among family and friends, a partnership agreement can provide benefits in the form of clarifying rights, relationships, and responsibilities related to the business venture. Without a partnership agreement, unnecessary disputes will certainly arise as the business operates over time. Friends may turn into enemies over issues that were supposedly decided in a handshake agreement, but were never spelled out in writing. The details of a partnership agreement help avoid conflict by establishing all the important aspects of the business in a written document to which all partners agree.

How to Sell a General Partnership Business

A general partnership is an extension of the partners; it is not a business that is a distinct entity separate from its owners. This means the partners generally have equal control of the business and are personally liable for all of the business’s debts. Also, because a partnership is not a separate, transferable entity, you cannot sell the business. You can only sell the business’s assets.

How to Set Up a Partnership in Virginia

Partnerships are a common business type because they are relatively simple to set up and allow for flexibility in management structure. A general partnership is an agreement between two or more people to go into business together for profit. The partners remain personally liable for the debts and obligations of the business. Virginia partnerships are governed by state partnership law and by contractual agreements between the parties.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

Steps for Dissolving a Partnership in South Carolina

Knowing the process for ending a general partnership can help partners effectively wrap up business affairs when it ...

Default General Partnership Rules in Tennessee

A general partnership in Tennessee must follow the state's default rules, found in the state's Revised Uniform ...

The Advantages of a Dissolution of Partnership Agreement

A general partnership is an entity allowing two or more persons to jointly conduct business for profit. The laws of ...

How do I Change an Existing Partnership to an LLC?

The laws of every state permit the creation of various types of business organizations. One type of business ...

Browse by category
Ready to Begin? GET STARTED