Dissolving a business partnership effectively while keeping the relationship with your former partner intact requires more than paperwork. If you've decided it's time to end your business partnership, you'll want to proceed cautiously to protect yourself and the company.
Most business partnerships are started with great expectations for success, often between friends or spouses. Yet, somewhere along the way, sometimes things start to go awry. In many cases, the problem is diverging priorities, whether that's shifting levels of effort, disagreement about strategy, or a strained personal relationship.
When that happens, it's time to dissolve the partnership—the sooner the better. You'll need to broach the topic with your partner but, before you do that, make sure you're crystal clear on how to dissolve a business. Here are five steps you'll want to take.
1. Review your partnership agreement.
You did draw up a partnership agreement when you started the business, right? Hopefully, you did, and in it you agreed on how you would deal with a partner wanting out, or if either partner felt the other wasn't pulling their weight and wanted to push them out.
Your agreement should cover "how the assets will be divided, terms of a buyout, and how to handle the dissolution if one partner is bankrupt," says Reuben Yonatan, founder and CEO of GetVoIP, who has dissolved a partnership.
If you didn't sign an agreement and you live in the U.S., Yonatan says, "then the Uniform Partnership Act will apply," if the partners live in one of the 37 states that abide by the act. Check with an attorney either way— whether you have a written agreement in place or not—to see what your rights may be.
2. Approach your partner to discuss the current business situation.
Before speaking with his business partner, Heinrich Long, a privacy expert with Restore Privacy, met with his attorney about their partnership agreement "to ensure termination could end amicably without any disputes."
So, when he and his partner did meet about his desire to end the partnership, he was prepared. "We discussed potential opportunities and worked together on an exit strategy. It was probably the closest and most productive we'd worked together in a long time," he says. They even managed to maintain "a relatively good personal relationship," he says.
"If you want your partner to leave, you have to convince them and, in most cases, it's all about giving up something—a certain percentage of the revenue, for example," says Adam Hempenstall, founder and CEO of Better Proposals.
Think about what you would be willing to accept, and what you would be willing to give up to exit the business, before you start this conversation.
When you come to an agreement about what will happen with the business—maybe one of you is buying out the other, or you've agreed to shut the whole venture down—it's time to make it official.
"The business dissolution process varies depending upon the type of partnership or entity under which the business operates and the terms of the business agreement effective at the time of dissolution," says Michelle DelMar, Esq, of the DelMar Law Offices.
The type of partnership also dictates the official process, she explains. "For example, there are general partnerships, limited partnerships, limited liability companies, professional limited liability companies, etc., and there are Partnership Agreements or Limited Liability Company Agreements, which influence the process and conditions of dissolution of businesses," says DelMar.
3. Prepare dissolution papers.
To confirm and formalize your agreement, you should have a qualified and experienced business attorney draft formal partnership dissolution documents. Each state has different requirements you'll want to become aware of.
According to DelMar, "A well-drafted agreement for the dissolution of a business partnership or limited liability company should address a number of important issues, including the ongoing expectations, rights, responsibilities, and limitations of each of the partners or members of the company, trademark assignment and/or right to use the company trademark, assignment of intellectual property, final tax return details, liquidation of assets, releases of liability, future cooperation amongst the partners or members, and other important issues."
Although you might want to immediately file dissolution papers with your state, DelMar cautions against being too hasty. There's a downside to official dissolution.
"While business activities may have ceased, it is often advisable not to immediately dissolve certain entities and partnerships, because once dissolved the protection ends and the partners and members could be exposed to personal liability," she says.
4. Close all joint accounts and resolve the finances.
Once the partnership has ended, it's important to pay all debts and to close all bank and credit accounts. If the business no longer exists, there should be no open leases, credit cards, loans, or other financial arrangements.
If one partner is taking over the business, they will be responsible for opening new accounts for the company, in their name alone.
However, some types of partnerships may require accounts to stay open. "If one member remains in a limited liability company, the limited liability company may not need to be dissolved; however, if the remaining individual operates a separate business, well-drafted Assignments for intellectual property, etc., would likely be necessary and that individual would need to open new business accounts for the separate business," DelMar says. Closing of accounts can be addressed in the dissolution agreement, she adds.
5. Communicate the change to clients.
Finally, alert your customers, suppliers, advisors, and community members that there has been a change to the business. Let everyone know either that the company has changed hands, has been sold, or is being closed down.
Formal business partnerships are actually fairly rare—the Census Bureau estimates only 8% of all new businesses are formed as partnerships—with the vast majority started as sole proprietorships. That low number may reflect the fact that entrepreneurs recognize how challenging maintaining agreement on business issues can be.