Business partnerships can end for several reasons – not all of them bad. But no matter how you end the partnership, it’s important to do it right.
Before you enter into a partnership, it’s a good idea to agree a mechanism with the other partners for the eventual dissolution of the partnership and to put procedures in place to make this possible. With that in mind, let’s look at seven essential considerations when dissolving a business partnership in Australia.
What is a business partnership?
Business partnerships are a business relationship between two or more individuals whereby the profits or losses of a business undertaking are shared between the respective members of the partnership. Depending on what type of business is involved, different types of business partnership agreements can be set up to manage each partner’s liabilities and obligations. If you want to learn more about setting up a general partnership – get in touch with our team here at Solomon Hollett Lawyers.
1. Make a solid exit plan
The key to ending a business partnership smoothly lies in your exit plan. A good exit plan will weigh the risks associated with various courses of action and give you a structured approach if you do decide to dissolve a partnership or retire from a partnership. Having an agreed mechanism for this which outlines the roles, responsibilities and terms of a dissolution or retirement of a partner from a partnership is critical to ensuring all parties are aware of their obligations. Without a solid exit plan, you may be vulnerable to an irreversible breakdown in the business relationship which could become extremely costly. A commercial dispute resolution lawyer can assist you with drafting a succinct and effective exit plan.
2. Understand the obligations
Dissolving a business partnership will require you to fulfil certain obligations owed to your partnership – or the partners more generally. Before you decide to dissolve, knowing exactly what your obligations are can avoid misunderstandings between partners and help the continuing partner(s) (if they are continuing to trade) to continue to do business despite the dissolution of the partnership or the retirement of a partner.
Depending on the type of dissolution or retirement agreement, partners may have ongoing obligations to fulfil even after they have retired from a partnership or a partnership is dissolved. These often include personal guarantees or payouts that are invoked on dissolution.
3. Have a clear reason for leaving
Leaving a partnership will impact not just your own financial situation but also the partnership which you plan to leave. Business partnerships can end for a variety of reasons, including:
- The partnership term has expired
- A partner may retire
- The death or bankruptcy of a partner
- A court orders the dissolution of the partnership
- The partnership business goes under
Make sure your reason for leaving isn’t just legal, but also the right thing to do. There may be other considerations you may want to consider – like family obligations, your financial position or even the well-being of employees. Either way, having a clear reason for leaving can help you and your partner(s) navigate the legal process more easily.
4. Understand the dissolution procedure
When it comes to dissolving a business partnership, you first need to establish whether there is a dissolution agreement that already governs how the process is to take place. If your partnership has such an agreement – you will need to follow the steps foreseen in that agreement in the absence of agreement to the contrary with the other partner(s).
If no dissolution agreement exists, or there is no agreement at all, the respective state Partnership Act will apply. For more on how to dissolve a partnership under Western Australian law, contact a qualified Western Australian commercial lawyer for expert legal advice.
5. Notify the other partner(s) of your intention to retire from or dissolve a partnership
The first concrete step to retiring from or dissolving any business partnership is sending written notice of your intention to retire from or dissolve a partnership. The notice must be given to all remaining partners. Any third parties who do business with the company should also be notified of the retirement of a partner or the dissolution of a partnership. When third parties are not made aware of the retirement of a partner or the dissolution of a partnership, this can expose partners to increasing liabilities and debts if outgoing payments or subscriptions are not ceased.
6. Ensure the assets are properly taken care of
If the partnership business does not continue to trade after a dissolution, the assets and liabilities accrued by the partnership should be properly dealt with – either in accordance with the terms in any applicable partnership agreement or via any applicable state law. Some key aspects you may want to consider before dealing with any partnership property are:
- Hiring an independent financial valuer (for assets or the company itself it goes on the market)
- Drafting a dissolution deed – a separate agreement that dictates how the partnership will be dissolved
- Confirming how outstanding debts are to be paid and by whom.
- Closing or deactivating any joint accounts held under the partnership name.
7. What to expect after retirement or dissolution
The period following a retirement from or dissolution of partnership can be more demanding than you expect. Ongoing obligations by partners following the termination of the partnership can last for years – while debts are settled and assets distributed or released. Whether under the terms of the agreement or via court order – this can take a while. Be prepared for a lengthy process. If you want to speed up the dissolution procedure, having appropriate legal assistance can go a long way in ensuring your best interests are protected.