Just like most marriages, the beginning of most business partnerships are filled with hope, optimism, enthusiasm and a general feeling of future success. Unfortunately, as with some marriages, problems develop over time in partnerships and a dissolution or divorce is needed. To ensure that the individual interests of each partner is properly protected, it is important to properly document both the formation and the dissolution of the partnership. The first step to avoiding expensive litigation at the end of the partnership is to adequately set out the important terms of the parties’ agreement in a written partnership agreement. The provisions that should be included in the partnership agreement are:
  1. the identity of the partners and their respective ownership interests
  2. the allocation of profits and losses
  3. the length of time for the partnership’s existence
  4. the method of making decisions which pertain to the partnership
  5. the amount of compensation paid to any partner for work on partnership business
  6. the method of accounting
  7. the method of keeping the partnership’s books and records and the location for the records
  8. the nature of the partnership’s business
  9. the type and amount of capital contributions of each partner
  10. if additional partners can be admitted and, if so, the manner of admitting a new partner
  11. events that will cause the partnership to dissolve, such as the death or bankruptcy of a partner, and
  12. a method for determining a buyout of a partner’s interest upon withdrawal from the partnership.

Properly documenting the terms of the partnership will help minimize disputes when the parties are encountering those problems which ultimately lead to the dissolution of the partnership.

The need to properly dissolve a partnership is stressed by one important principal of law – in a general partnership, every partner is personally liable for debts incurred by the others on behalf of the partnership. The dissolution of a partnership is the process by which the world is put on notice that one, several, or all of the partners are not responsible for the debts and liabilities of the others going forward. To provide the proper notice, the partners should file a statement of dissolution with the California Secretary of State as soon as the partnership is dissolved. The California Corporations Code provides that 90 days after the statement is filed, third parties are considered to have knowledge that no partner has authority to enter into binding transactions on behalf of the partnership other than to wrap up the business. It is also important to send out a notice to all vendors, customers, suppliers and clients announcing the dissolution, including any information regarding any person or new entity that will be taking over the business of the partnership.

At the time of the dissolution, the partners should examine all contracts, leases and loan agreements to see if the dissolution will affect those agreements. If there are any continuing obligations that survive the dissolution, the partners should attempt to allocate responsibility for the obligations.

Business attorneys generally get involved in partnership dissolutions when the parties cannot agree on the proper method of wrapping up the business and dividing the assets and liabilities. The best way to avoid expensive litigation is to document the terms agreed to by the parties before the disputes arise. In the same regard, the best way to avoid continuing liability at the end of the partnership is to provide proper notice of the dissolution.

The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Reid & Hellyer, APC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.