Dissolving a Partnership

Dissolving a Partnership

At some time, you and your partners may decide to end your partnership. This is called dissolving the partnership. It may occur when you are ready for retirement, the business is no longer profitable, or for a number of other reasons. Whatever the reason, there are certain things that must be done.

Dissolving a partnership is basically a four-step process.

  1. Stop doing business
  2. Sell the partnership assets
  3. Pay off all creditors
  4. Divide the balance between the partners

Of course, before you begin these steps, you and your partners must first meet and discuss dissolution. To make sure you are all in agreement and that the dissolution goes as smoothly as possible, you may want to sign an agreement to dissolve the business.

The next step is to begin carrying out the terms of your agreement. This is referred to as winding up the partnership business. This involves closing the doors to your customers, and notifying your creditors that you are going out of business. You will then need to pay all of the partnership's outstanding debts, selling assets if necessary, to raise the needed cash.

Once this is done, the balance of the partnership’s assets will be distributed among the partners. Either all assets can be sold and cash distributed, or a combination of assets and cash can be distributed. Such distribution should be according to each partner's right to receive profits.

If there are not enough assets to enable the partnership to pay off creditors, each partner may need to contribute personal funds to accomplish this. The details of how much, if any, personal contribution is needed to settle business debts will be greatly affected by the liability obligations of the different partners. For example, a limited partner is responsible only for what they’ve invested into the company.