Partnerships and Law

Partnership Dissolution

How Partnerships May Dissolve

Partnerships may dissolve in several ways: through expiration of time for a fixed-term partnership; by mutual agreement, court order, or operation of law; through expulsion; by death or incapacity of a partner; or through resignation, withdrawal, or retirement.
A partnership may be created for a specific time period. In that event the partnership will be dissolved, and its existence will end when the specified time has passed. That dissolution, or ending of the partnership, happens without the partners taking any action.
A partnership may be dissolved by any of the following: passage of time, agreement of the parties, court order, operation of law, expulsion, death or incapacity, retirement or withdrawal.
A partnership can also be dissolved at any time by the unanimous agreement of the partners. That unanimous agreement can be expressed orally, but the best practice is for all partners to sign a written document declaring that the partnership is dissolved.

A court can also dissolve a partnership. Circumstances in which a court may do this include the following:

  • The court receives proof that, as a practical matter, the partnership business can only be operated at a loss.
  • The court learns that one of the partners has committed fraud against the other partners.
  • Irreconcilable differences exist among the partners as to issues involving the partnership.
  • The stated purpose of the partnership becomes illegal.

If a partnership agreement allows for expulsion, which is the removal of a partner by the remaining partners, and a partner is expelled, the partnership will be dissolved unless the partnership buys the interest of the expelled partner.

When a partner dies, that person's interest in the partnership passes to someone else. However, it would be unfair to force existing partners to accept a new partner, so any of the existing partners can seek to dissolve the partnership immediately. Likewise, if a partner becomes permanently incapacitated and a guardian is appointed for that person, the other partners can seek to dissolve the partnership. No person can be forced to be a partner with someone they did not agree or consent to be partners with.

What if a partner resigns, withdraws, or retires? If there are only two partners, then the partnership will be dissolved. Under the Uniform Partnership Act, the statute that standardizes the rules for partnerships, when a partner in a multipartner partnership leaves, the remaining partners may buy the interest of the leaving partner, and the partnership continues.

Who Should Be Notified of a Partnership Dissolution?

To manage liability, partners should notify existing and potential creditors of a partnership dissolution.

Because a partnership can be dissolved without the consent of all the partners, one of the first notices of the dissolution of a partnership should be to all the partners. This notice should be delivered to the partners personally.

Over the time that a partnership exists, it deals with clients, customers, employees, and suppliers. Each individual and entity that the partnership has dealt with should receive actual written notice of the dissolution of the partnership. It may not be possible to remember all the individuals and entities that a partnership has dealt with over the years, and current contact information for them may not be available. For these reasons, the partnership should also give constructive noticewhich is given to third parties who have knowledge of a partnership but no dealings with them—notifying the necessary entities that the partnership has been dissolved. This is often given by publishing a notice in a newspaper in the area of the business.

A partnership deals with local, state, and federal governments (for example, to receive licenses and pay taxes). Therefore, actual notice should be given to appropriate government offices and other third parties that the partnership has been dissolved.

A dissolved partnership may still owe money to creditors. The former partners may or may not know that the debts remain unpaid. This is another reason for publishing constructive notice in a local newspaper or similar news source.

For example, a partnership has operated successfully for several years, but the partners have decided that they each want to pursue different interests and have decided to terminate and dissolve their partnership by unanimous agreement. Either the projects for current clients will be completed by the partnership, or arrangements to have the projects completed by others will be made as part of the dissolution of the partnership. Current suppliers will be paid as part of the dissolution process. The partnership should give actual written notice to all their current clients, informing them that the partnership is being terminated and how their projects will be completed, and to all their current suppliers, informing them that the partnership is being terminated and how moneys owed to them will be paid. The partnership should also give constructive notice to all the former clients and former suppliers that the partnership is being terminated to ensure that those former clients and suppliers will be aware that the partnership no longer exists.