A business partnership might come to an end for any number of reasons. There might be a disagreement about the direction the business should take, or maybe one partner would like to move on to new opportunities.
Whatever the context, the partnership must be dissolved if one partner wants to leave, even if the others want to continue. After that, a new partnership can be formed with the remaining members who can then resume operations on their own.
Dissolving a partnership can often be a straightforward matter. However, if the partners are in dispute the situation might be more difficult to resolve.
In this article, we will give an overview of partnership dissolution and go over some things that can affect the process.
What is the process to dissolve a partnership?
The process of ending a partnership depends on what type of partnership it is - a standard business partnership or a limited liability partnership (LLP).
In the case of LLPs, partners can leave without interrupting the flow of the business, but standard partnerships automatically come to end unless specific provisions have been laid out in a Partnership Agreement.
In the first instance, the partner who wishes to leave should create a written notice of dissolution to serve to the other partner(s).
This can result in one of two different types of partnership dissolution:
- General dissolution is when the dissolution ends the business entirely. This might be done when the partners decide that the business is not financially viable to continue and that it is best to close it down.
- Technical dissolution is when one partner wants to leave and take out their share in cash, but the business will continue without them. In this instance, the original partnership is dissolved and a new one formed without any interruption to trading.
Dissolving a partnership without an agreement
For business partnerships that have no Partnership Agreement in place, the rules of the Partnership Act 1890 will be in effect.
This means that the partnership is automatically dissolved if one of the partners gives notice that they want to leave. They do not need to supply a reason for leaving and this can happen with immediate effect.
The Partnership Act also means that a partnership can be automatically dissolved in the event of numerous other occurrences, such as:
- One of the partners going bankrupt
- The death of a partner
- The partnership reaching the end of a previously agreed fixed term
- The fulfilment of a particular objective which was the main purpose of the partnership
- An event occurs which means it would then be illegal to continue to operate under the partnership
- The court orders the dissolution of the partnership (which can be done on numerous grounds, including a breakdown in the relationship between the partners, the business losing money, misconduct, or other reasons for being unable to continue).
There are numerous issues to resolve when dissolving a partnership, and much to negotiate.
A dissolution agreement can provide a good framework for tying up 'loose ends' as the partnership comes to an end and the partners prepare to go their separate ways.
A dissolution agreement might include provisions for the following:
- Who is liable for any debts
- How assets are to be divided up
- Who will take over the business name
- Who will own any intellectual property (IP) rights
- Broken contracts
- Final accounts
- Termination of bank arrangements.
Dissolving an LLP
Dissolving an LLP can be a fairly straightforward matter if there are no disputes between the partners, and this is quite common in cases where partners wish to retire or are no longer trading.
There are some restrictions to consider when voluntarily seeking to dissolve an LLP, and it is a legal offence to apply for dissolution when they are in effect. For example, it is not possible to end an LLP if the business has traded or changed its name within the past three months.
Once the application has been received by Companies House, it will get added to the LLP's public record. Companies House will also send notification to the registered address of the LLP, which may want to object to the application in the event that it was not legitimate.
However, the LLP can only be dissolved and struck off the register if there are no outstanding debts to creditors.
LLPs and compulsory liquidation
There are a number of methods by which an LLP can be liquidated. It is possible for an LLP with significant debts to be wound up by a creditor.
If a creditor is owed more than £750 and they can prove the LLP is insolvent, they may send a statutory payment demand or a county court judgement for repayment.
If the payment isn't made within seven days, the LLP will be forced into liquidation and its assets sold to recoup money for the creditors.
For the former partners, there will be an investigation into their conduct and they may be made individually liable for company debts. They may even be prohibited from acting as directors for other businesses for as long as fifteen years.
During the investigation, the liquidator will seek to determine whether the interests of creditors were prioritised as the LLP became insolvent. Partners will be required to attend an in-depth interview, and they may ultimately be made personally responsible for some or all of the debts if fault can be found with their conduct.
While it is a relatively straightforward matter for partners to dissolve their own LLP and have it struck from the Companies House register, they cannot do this to get out of trouble if the business has outstanding debts. If the LLP is removed from the register while it still owes money, creditors can apply to have it re-added so that they can pursue the company for repayment.
Ultimately, there are numerous ways to dissolve partnerships depending on the particulars - whether it is a business partnership or an LLP, whether a Partnership Agreement is in place, and so on.
If in any doubt, it is a good idea to seek the help of a professional legal expert who can guide you through the process and help ensure that all ‘loose ends’ are tied - and that you and your former partners can move on to new experiences with a minimum of fuss.