Partnerships fail for many reasons. Misalignment of personality is possibly the first reason that springs to mind, but according to Michigan law firm Family & Aging Law Center , the two most common reasons that business partnerships fail is 1) failure to make an adequate plan, and 2) more importantly, from a legal perspective, failure to have a written partnership agreement that outlines in detail the partnership structure.
Why is the partnership agreement so important? Most partnership agreements are written up at the beginning of the business venture and outline how the partners will run the business – how business decisions are made, how responsibilities are divided, how disagreements will be resolved and so forth. A good one will also include a dissolution strategy, like a prenuptial agreement. Although not required by law, it can be extremely risky to operate without one. Essentially, a good agreement brings structure and agreement to the partnership – without one, partnerships run the risk of being run like separate businesses within the business, with each partner doing (or not doing) their own thing!
Without a partnership agreement, dissolving a partnership can get nasty and carry a lot of risk. For example, if a partner isn’t paying bills on time or making regular contributions to pay off a business loan. Lapses and disagreements like these can quickly spiral out of control and impact your creditworthiness, relationships with vendors and so on.
Even if you do have a partnership agreement, you are carrying an element of shared liability. Each partner is liable for the actions of the business, its debts, and of course, you also have to split profits.
So what are your options when it comes to dissolving a partnership that’s gone bad? Here are some considerations to bear in mind for those who have partnership agreements and those who don’t:
- Change the weighting of the partnership agreement
You don’t have to dissolve the partnership entirely. Perhaps you might change the weighting of the partnership so that you assume a majority share and with it more control over decisions and/or finances, while your partner agrees to remain involved, but to a lesser extent than currently.
- Buy out your partner or sell your share
If you want to continue the business, you could buy your partner’s share, or sell yours if you want out but your partner doesn’t.
- Legally dissolve the partnership
If you have a partnership agreement, revisit it and review your dissolution plan. Then take a look at the current state of your business to ensure a clean break. For example, have all partners completed all agreed duties? What’s your business worth (use a third party valuation firm to help pinpoint this number)? What about leases, loans, and other contracts – how will the dissolution affect them and who will own the continued liability?
As you can see, there are many considerations, so make sure you consult a lawyer to help protect your interests in any dissolution or restructuring of the partnership. They can also help draft a dissolution agreement that protects you from future disputes or claims that may be brought against you.
It’s also important to note that any dissolution of that partnership is governed by state law. Visit your state’s website for more information about the process and the forms you’ll need. It can take up to 90 days for the dissolution to become official. Once your partnership is dissolved, you can typically expect each partner to assume business assets and liabilities based on percentage of ownership.
- When there’s no partnership agreement
If you didn’t have a partnership agreement that outlined a dissolution strategy, try to work out terms together. If not, an intermediary may be able to help you resolve your dispute through mediation. Many law firms offer these services. Your final resort is a court-dictated decision which could be costly and may not provide the result you were looking for. Courts often divide assets and liabilities 50-50 regardless of any disputes.
Other factors to consider
Don’t forget to let the IRS and state revenue office know that you are no longer in partnership the next time you file a return. Notify customers, vendors and others that your business structure has changed or dissolved. You’ll also need to take care of other loose ends such as business licenses, permits and canceling a trade name or “doing business as” name with your local government. Refer to SBA’s Closing Your Business guide for more information.
