Legal Exit: Dissolving A Partnership Agreement 

Most often than not, the hope of a successful business births partnerships. If we lived in a perfect world, all partnerships would succeed. But we live in an imperfect world.

Hence dissolving a partnership agreement is a skill you need to polish.

Business partnerships come with various risks, which may result in complications during dissolutions. To manage these risks adequately, it’s great to state the dissolution process in your partnership agreement.

That way, you won’t struggle with lawsuits or messy situations if the business fails.

Are you wondering how you can get out of a partnership agreement? Keep scrolling; we’ll fill you in.

What’s The Difference Between the Termination And Dissolution Of a Partnership?

Put simply, the dissolution of a partnership is the process leading up to the winding up of a partnership business. It’s the steps that prepare a company for termination.

On the flip side, termination means finality. It means the company has halted all business activities and ceased to exist.

Dissolving a partnership or limited liability company entails a couple of steps. For instance, you must pay the company’s debt and settle the obligations and liabilities. Plus, you must inform all creditors of the dissolution if they need to recoup some monies legally.

While initiating a partnership termination process, a company must cease all business activities.

Partners may decide to dissolve a company due to death or any other reason, provided they do so in accordance with the law. Speaking of laws, registered partnership businesses must follow the dissolution and termination rules in the state of registration.

When Does It Make Sense To Terminate A Partnership?

You can choose to end your business partnership for various reasons. Some of the most common ones include

  • Severed Personal Relationship: Partnerships can only thrive when the parties are on good terms. It becomes challenging to keep up a partnership when the partners’ relationships are strained. 
  • Disparity In Efforts: When only one party is pulling the weight in the business
  • Strategy Disagreements: Disagreements regarding strategy can lead to dissolution. When parties want different things from the business.
  • Expired Partnership: When the partnership time lapses
  • Retirement: One or all parties in the partnership is ready to retire. 
man writing on paper
Photo by Scott Graham on Unsplash

Full Guide To Dissolving A Partnership Agreement

Before initiating a partnership contract, we suggest including a dissolution clause in your partnership agreement.

The clause can state the termination procedure clearly to avoid misunderstanding.

Don’t have a prior termination clause in your agreement? No worries. You can launch a dissolution through any of the following ways:

Review Your Partnership Agreement

Before you terminate a partnership agreement, reviewing the terms of your contract is essential.

This will help ensure that all parties know their rights and obligations under the agreement.

A partnership agreement should include details about how the partnership can be terminated.

For example, it may specify whether one or both partners must agree to end the partnership. Or indicate what type of notice needs to be given before the termination takes effect.

Determine The Terms

If you are still on good terms with your partner, you can discuss the dissolution process. But if your partnership suffers a strained relationship, you may ask for an attorney or a neutral party to mediate.

Buy-Out Options

Is buyout an alternative? If other partners want to continue the business, they may buy out the company. You can check the partnership agreement for such options to ensure you have proper guidance.

If your agreement doesn’t offer a buy-out formula, there are two options for determining the buy-out price:

  • The price can be based on the liquidated price of the company.
  • The business sale price as a going concern.

Create a Dissolution Agreement

Draft a contract for the termination procedure. You may vote to make decisions regarding the dissolution. The dissolution agreement should state the terms you decide on during your meetings. And where you had to vote to decide, it should document each partner’s choice.

Confirm Details Of The Terms

Double-check the agreements before signing to ensure all the terms of your partnership termination are complete.

Follow Your State’s Business laws

Focus on state laws regarding business partnerships. For more details, you can check out the relevant termination cost and the required forms.

File a Dissolution Statement

This may take about 90 days. But you need to file a dissolution statement with your state.

Notify Your Clients Personally

Although state law may require public notice, ensure you notify all your customers of the dissolution personally.

Share The Remaining Assets

If you still have assets after settling your business debts, you may divide the assets as stipulated in your contract.

Can A Dissolved Partnership Be Sued?

The short answer is: it depends.

If your partnership entered into an agreement that doesn’t absolve you of obligation through dissolution, you could be sued.

But on the contrary, you may avoid such a lawsuit where the contract clearly states a dissolution terminates the agreement.

Hence, it all depends on the circumstances.

Final Words

Dissolving a partnership agreement is not something to be taken lightly. You must approach the situation with clarity and caution.

It can be tricky to sever ties without creating hard feelings or leaving yourself vulnerable to legal action.

But if done correctly, you can ensure that all parties involved are treated fairly while protecting your interests. And you can avoid unending court sessions.

By considering the nuances of each situation, partners can end their arrangement in a way that leaves everyone satisfied and secure.

Abir is a data analyst and researcher. Among her interests are artificial intelligence, machine learning, and natural language processing. As a humanitarian and educator, she actively supports women in tech and promotes diversity.

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