Dissolving A Business Partnership

Dissolving A Business Partnership

Partnerships are one of the most common business structures.

In order to establish a partnership all that is required is two or more individuals carrying on a joint business venture with a view to profit, each incurring liability for losses and the right to share in the profits.

Like a de facto relationship, no formal documentation or procedure is required to establish a partnership.

A partnership can be construed by conduct.

Like a marriage, formal documentation, in the form of Deed or Agreement of Partnership may be entered into between the parties to formalise their relationship.

The Deed or Agreement may be used by the parties as “the rules” of the business relationship and it is clearly better to have something in writing than not.

Depending on the complexity of the enterprise and the relationship of the partnership, the Partnership Agreement should deal with the following topics:

  •  Name and address of the business and its purpose
  • Name and addresses of partners
  • Duties and responsibilities of each partner
  • The process for making decisions
  • The amount of money (capital) each partner will contribute
  • Bank accounts and accounting details
  • Details about how profits and losses will be shared
  • Details about the payment of wages/income to partners
  • Dispute resolution processes
  • How to dissolve the partnership, including valuing and distributing assets

Like de facto relationships and marriages, unraveling a partnership in the event of an irretrievable breakdown of the business relationship can be stressful, difficult, drawn out and costly.

The termination of a partnership is usually referred to as a dissolution.

The law in relation to partnerships is covered by common law (case-based law) including the law of contract and statutory law, ie the Partnership Act, which was enacted in 1891 and remains in force today.

The Partnership Act sets out a number of ways in which a partnership can be dissolved:

  •  The term of the partnership term as set out in the Partnership Agreement has expired
  • One partner gives written notice to the other partner to retire from the partnership
  • One or both partners can no longer legally own a business (for example, through bankruptcy)
  • One of the partners dies
  • The Court makes an order dissolving the partnership
  • The partnership itself becomes subject to the appointment of a receiver

Most partnerships are dissolved when one partner decides or agrees to leave the partnership. It is important that this be done by written notice as a question may otherwise arise as to whether the retiring or outgoing partner may continue to be liable for the ongoing debts of the partnership.

You may wish to carry out the dissolution of a partnership through the assistance of your accountant (although the partnership accountant may have a conflict of interest in doing so) or although you and your partner may do so yourselves but it is critical that the procedures be formalised and in writing in case a dispute arises at a later date and matters need to be proved in Court.

Better still, you should instruct us to act for you to ensure all issues are dealt with and the dissolution of partnership can be formalised in a Deed of Dissolution of Partnership.

It is important to note that all of the debts of the partnership must be paid from all of the assets and income of the partnership. Any surplus assets are then distributed to the partners as set out in their partnership agreement or otherwise agreed in the Deed of Dissolution of Partnership.

A comprehensive Deed of Dissolution is critical because it should cover any or all of the following issues:

  • Reciting and announcing the dissolution
  • Conduct of the partnership between the dissolution date and the date of winding up
  • Sale, transfer or retention of partnership assets
  • How liabilities of the partnership are to be dealt with
  • Status of and liability for employees
  • Preparation of accounts
  • Payments to partners
  • Insurance issues
  • Indemnities and releases (eg what to do with guarantees)
  • Third party contracts
  • Confidendiality
  • Restraint of trade or non-competition issues.

Along with the possible benefits derived from conducting a business in partnership, there are numerous risks and threats.

Both sides of the risk-benefit equation should be dealt with at the commencement of or during the business relationship by a legally sound and comprehensive Partnership Agreement and certainly at the end of the business relationship with a Deed of Dissolution of Partnership.

If you are in a partnership but would like to better document or formalise the terms of the partnership, or looking to exit or dissolve a partnership, please do not hesitate to call us on 8276 7955 or email us at  dino@dirosalawyers.com.au .