Partnership Dissolutions: What Happens?
When business people enter into open ended partnerships, which is most common, then generally any partner can dissolve the partnership by giving notice to the other partners. When this occurs, some of partners may continue the business, but only with agreement of the existing partner. This may not occur. Particularly when there is a bitter fight. If it does occur, it will usually require paying the exiting partner the value of their share in the partnership and some arrangement for the payment of liabilities.
However, when no agreement is reached, the partners must normally wind up the affairs of the partnership. This requires:
- the liquidation of assets;
- settling of all debts;
- making up of any deficiencies by the partners or distribution of any surpluses to the partners.
This may be done by the partners, if they are able to cooperate, or by an appointed receiver.
On application to the court by a partner, the court may step in and select the method of sale which, on balance, will benefit the partners. This may be the sale of the business as a going concern to a third party. Also possible, but less likely, is the sale of the business to one or some of the partners. In such occurrences, the business will need to be valued independently.
This is all subject to any agreement entered into between the partners setting out what is to occur if any partner wants out. This is normally contained in a partnership agreement. A common scenario is this:
- if one of the partners wants out, they must give the others notice of this;
- the notice is to provide the sale price for the exiting partner’s share.
- a period of time is allowed for negotiations between the exiting partner and the others.
- if no agreement is reached (and provided the other partners want to buy the share), the business is independently valued.
- the partners will be bound by the valuation to determine the sale price.
- the partners will then have a period of time to purchase the exiting partner’s share.
In this scenario, the business is likely to survive. The risk of the business being lost by the other partner, who want to continue, is minimised. For this reason, business people considering partnerships should enter into a partnership agreement setting out an agreed mechanism to allow for a partner to exit. Sooner or later, it is likely to happen.
What to do next: if you would like more information on partnership dissolutions and disputes, or on partnership agreements generally, call me on (07) 3103 3199.
Leaving a business you co-own, or buying a co-owner out? See Exiting a Business Partnership in Queensland.
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Joe Kafrouni, Accredited Specialist in Business Law, Kafrouni Law
Disclaimer: This article is general information only and is not legal advice. Before acting on it, get advice on your own circumstances. To the extent the law allows, Kafrouni Law accepts no liability for any loss arising from reliance on it. This article is the copyright of Kafrouni Law.
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