Dissolving Limited Partnerships

By Jeff Franco J.D./M.A./M.B.A.

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.

Limited Partnerships

The limited partnership is a modern variation of the traditional general partnership structure for operating a business. Under traditional general partnership rules—which are still used today—each partner is jointly liable for the acts of other general partners provided it’s in the ordinary course of partnership business, as well as all debts and obligations of the partnership. A limited partnership, on the other hand, has both limited and general partners, but the limited partners aren’t liable for the acts of other partners or for partnership debts—their risk is limited to the investment or contribution they make to the partnership. General partners always have the right to participate in managing the business, whereas limited partners don’t.

Events Requiring Dissolution

Most states don’t limit the life of a limited partnership; typically, it continues to exist unless an event occurs requiring the partnership to dissolve. If the partnership agreement—which is the document that governs all aspects of the limited partnership—requires the partnership to dissolve if a specific event occurs, the partners must wind up the business and cease operations if the event does in fact occur. In the absence of a dissolution clause in the partnership agreement, a limited partnership may need to dissolve if all general partners and all limited partners who own a majority of the rights to receive distributions from the partnership agree to dissolve. Dissolving the limited partnership may also be necessary when no limited partners exist for 90 days or more and in some cases when a general partner disassociates from the partnership.

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State Dissolves Partnership

State governments can also force dissolution of a limited partnership when the business fails to comply with certain governmental requirements. For states that have adopted the ULPA, this can occur when the partnership is more than 60 days late paying taxes, fees or penalties it owes to the state, or if it fails to submit its annual report. However, the partnership can apply for reinstatement within two years of the act causing government dissolution.

Winding Up Partnership

Dissolving a limited partnership always requires the general partners to wind up all business affairs. For the most part, this involves settling existing debts and liabilities of the partnership, selling business assets and distributing remaining funds in accordance with the partnership agreement or pursuant to state law. The ULPA also allows the limited partnership to file a certificate of termination with the appropriate state agency to provide formal notice that the partnership no longer exists. However, states that don’t follow the ULPA—such as Delaware—allow for the filing of similar certificates that provide the same type of notice, which can ultimately protect general partners from liabilities that arise after dissolution.

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How to Convert a General to a Limited Partnership
 

References

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Delaware Limited Partnership Law

Limited partnerships, or LPs, are governed by the Limited Partnership Act in Delaware. This act authorizes the formation of a partnership with at least one general partner and additional limited partners. While the general partners remain personally liable for the debts of the business, limited partners are liable only up to the amount of their financial investment. To form, operate or dissolve an LP in Delaware, you must observe all state guidelines and filing requirements.

How to Disband a Partnership

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.

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 comes time. In South Carolina, the filing of dissolution paperwork with the state is generally not required. However, it is a good idea for partners to execute a written agreement regarding distribution of company assets and payment of creditors in the event of dissolution. Additional steps, including cancellation of professional licenses and permits as well as satisfaction of tax liabilities, may also be involved.

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