A partnership is a common business structure where a relationship exists between two or more people or entities who are carrying on a joint business venture with a view to profit. We recommend you consider the following tips if you are contemplating entering into a partnership, are involved in a partnership or wish to dissolve a partnership. Involvement in a partnership exposes individuals to numerous benefits and risks, therefore it is important you are aware of your obligations.
1. Have an Exit Plan
Having a plan for the day you may leave a partnership is a valuable commercial and personal investment and can avoid a costly dispute. Consider drafting a legally comprehensive partnership agreement at the outset of the partnership to formalise the relationship, outline the ‘rules’ of the partnership and safeguard yourself in the event of an irretrievable breakdown. A commercial lawyer can assist you with drafting a legally sound agreement.
2. Determine How the Partnership was Established
Consider if you have entered into:
- a formal partnership agreement, that is, an agreement in writing signed by all partners; or
- an informal partnership agreement, that is, an agreement made orally or via conduct.
3. Establish Your Reason for Dissolution
Subject to the partnership agreement, any partner can dissolve the partnership and bring the business to a close. A partnership may be dissolved because:
- the duration of the partnership has expired;
- resignation of a partner if the partnership was established for an indefinite period of time;
- the death of a partner or one partner becomes bankrupt;
- there is a court order;
- the business has gone bankrupt or insolvent.
4. Determine the Procedure for Dissolution
If you have entered into a formal partnership agreement ensure you are familiar with the terms of the agreement, as dissolution may only be permitted in specific circumstances. The process for terminating a partnership that is governed by a partnership agreement is dependent on whether the agreement specifies a procedure. If a procedure is specified, parties must comply with it. If there is no specified procedure, parties will be required to comply by the requirements of the Partnership Act 1895, if they cannot otherwise reach agreement on the termination process.
5. Intention to Dissolve
Partners must provide notice of their intent to exit or dissolve the partnership in writing to all partners. Additionally, advise third parties that the partnership is ending. This will limit the exiting partner’s exposure for the debts and liabilities of the partnership.
6. Winding-Up and Distribution of assets to begin winding up the partnership you may want to:
- get the partnership business valued by an independent valuer;
- consider drafting a deed of dissolution, which sets out the terms in which the partners agree to dissolve the partnership;
- ensure debts the partnership has incurred are paid in full using any assets and income of the partnership, or specifying how any shortfall is to be met by the partners;
- sell and distribute additional assets amongst the partners subject to the terms of a formal partnership agreement or deed of dissolution;
- close any accounts in the partnership name.
7. Obligations After the Dissolution of Partnership
Ensure you meet any ongoing legal obligations after the dissolution of your partnership, including any personal guarantees the partners may have provided that could not be released or discharged upon the dissolution.
This short article provides general information about partnerships. We recommend seeking professional legal advice from a lawyer experienced in commercial law in regards to your specific circumstances.
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