How to Dissolve a Partnership

How to Dissolve a Partnership

by Belle Wong, J.D., June 2015

There are many reasons you may want to dissolve a partnership. A partner may retire, or perhaps becomes bankrupt. Or perhaps you and your partners created your partnership in order to meet specific objectives, and with those objectives now met, the partnership is no longer necessary. Dissolving a partnership may not even mean you and your partners do not want to do business together anymore; in some cases, the growth of your business may mean a corporate structure is now the more appropriate business structure for your business.

How to Dissolve a Partnership

Whether your partnership is a general partnership, a limited partnership or a limited liability partnership (LLP), and whatever your reasons for dissolving the partnership, there are a number of things you will need to do to ensure the dissolution of partnership is done properly. It’s important that you correctly and completely dissolve your partnership, in order to ensure you have ended your liability under the partnership arrangement.

Your Partnership Agreement

Hopefully your partnership agreement will include a dissolution clause or terms of dissolution; some partnership agreements may even include specific dissolution procedures to be followed for specified circumstances. If your particular situation, or a dissolution in general, is covered under your partnership agreement, you will need to follow the provisions outlined in the agreement for dissolving your partnership.

What if There is No Provision for Dissolution in Your Partnership Agreement

What if your partnership agreement doesn’t include any provisions for dissolution? Or perhaps you and your partners never had a formal partnership agreement to begin with. In such cases, you will need to sit down with your partners and decide on the terms of dissolution together. There are a number of things which must be considered when dissolving a business. If you have problems coming to an agreement, you might want to consider hiring a third party to help you. If all else fails, you can apply for a court-ordered dissolution, but keep in mind that’s an expensive route that may not result in what you would consider an equitable solution.

Partnership Dissolution Agreement

Even if your partnership agreement contains provisions for dissolution, you and your partners should discuss the issues related to your partnership dissolution, including how outstanding obligations and debts should be handled. Once you’ve come to an agreement, a partnership dissolution agreement should be drafted. A dissolution agreement sets out the termination terms to which you’ve agreed, and can provide clarity on issues which may help prevent any future misunderstanding.

If the dissolution issues your partnership faces are complicated, consider hiring an attorney to help you draft a dissolution agreement that will address your particular needs.

Before you sign the dissolution agreement, make sure that all duties and obligations each of you have agreed to under the terms of the partnership have been completed and that no duties remain outstanding.

State Laws

In addition to your partnership agreement, you’ll need to check your state business laws, as the dissolution of partnerships is governed by state law. Your state’s Secretary of State office or website should provide information regarding the process that applies to a partnership dissolution, any applicable termination fees, and the forms which need to be filed.

You’ll be required to file a statement of dissolution (in some states this is called a certificate of cancellation) with your state. It can take up to 90 days from the date you file the statement of dissolution for your partnership to be dissolved.

Notify Your Clients, Customers and Suppliers

While your state laws might require you to publish a notice of your partnership dissolution in a local paper, it’s important that you also directly notify all the people and businesses with whom you’ve dealt with as a partnership. By giving this notification to your clients, customers and suppliers, you’re informing them that the partnership no longer exists, and you along with your partners will no longer be responsible for each other’s debts and obligations under the partnership.

Other Matters

Other matters which should be dealt with on dissolution include:

  • Permits, licences and registrations. Terminate or cancel your partnership’s business permits, licenses and any business-related registrations, such as a fictitious name registration.
  • Creditors and taxes. Creditors should be notified and their accounts settled. If your partnership had any employees, payroll tax deposits should be made as required and any necessary employment tax forms filed. Inform local, state and federal tax agencies of your partnership dissolution as well.
  • Contracts, leases and other agreements. Any contracts, leases and agreements relevant to your partnership need to be examined to see how the dissolution will affect them. For example, some agreements may become void if your partnership dissolves, while others may require that the terms of the agreement continue to be carried out regardless.
  • Bank accounts. Close out any of the bank accounts related to your partnership.

After the partnership has settled all its outstanding debts and obligations, partners should receive back the money they originally put into the partnership. After these capital contributions have been returned, the remaining assets of the partnership, if any, should then be distributed according to each partner’s ownership interest.

Partnerships do end, for a number of different reasons. It’s important to completely and correctly dissolve your partnership so that you properly terminate your obligations under your partnership arrangement.

LegalZoom can help you dissolve a partnership online. Filing Articles of Dissolution through LegalZoom is simple and affordable. Begin by answering a few questions about your business and LegalZoom will help you take care of the details.