Dissolution Of Partnership

Dissolution can occur because the partners have decided to go their own way, because a partnership set up for a fixed time has run its course or, more usually, because there is no partnership agreement and one of the partners wants to leave or other partners want to expel him or her. It will automatically occur where one partners dies or is made bankrupt where there is no partnership agreement. This article will provide a depth information vis-a-vis procedure and consequences of partnership dissolution.

Dissolution of Partnership

The breakup of a business partnership can be as painful as a divorce of a married couple. It is preferable that the possibility of a partnership dissolving is dealt with in the original partnership agreement form. If not, the law provides a variety of circumstances which will lead to it. If the business is disposed of after Partnership Dissolution, there is a set procedure as to what will happen to the proceeds.

What is a Partnership?

A partnership may exist where two or more people carry on business together with a view to making a profit. No formal registration or incorporation process is necessary — similarly a formal written agreement is unnecessary — a legally binding partnership may arise unintentionally. In this situation, the law will often imply terms into the partnership. Whilst relatively easy to create, partnerships are very difficult to bring to an end.

Difference between Dissolution and Termination of Partnership

Dissolution of a partnership generally occurs when one of the partners ceases to be a partner in the firm. Dissolution is distinct from the termination of a partnership and the “winding up” of partnership business. Although the term dissolution implies termination, dissolution is actually the beginning of the process that ultimately terminates a partnership. It is, in essence, a change in the relationship between the partners.

Modes of Dissolution

A partnership may be dissolved by mutual consent, by expiration of predetermined time, by death of one of the partners, by insanity, by the bankruptcy of either partner, or by the court for any good cause, such as dishonesty of one partner against the rest, or incapacity caused by habitual drunkenness or conviction of any crime. Dissolution of a partnership occurs when the contractual relationship joining all of the current partners together comes to an end. In cases where one member withdraws from a partnership, the remaining partners may carry on running the business as before, but technically a new partnership is formed. The circumstances for and the consequences of dissolution can be specified in a partnership agreement. However, if they are not so specified, the general provisions of the Partnership Act (the ‘PA’) can be applied. Under the PA, a partnership is dissolved should any of the following events occur:

• Notice A notice of dissolution can be given by any partner to the other(s). This notice need not state any reason for the dissolution and can have immediate effect. The notice doesn’t have to be in writing unless the partnership agreement requires it to be in writing.
• Expiry of fixed term A partnership will dissolve on the expiry of a pre-agreed fixed term, unless the agreement provides for the partnership to continue even after the fixed term has expired.
• Completion of project If the partnership was entered into to do a specific thing or for a specific objective, when that objective has been reached or that thing done, the partnership is automatically dissolved.
• Death or bankruptcy Death or bankruptcy will automatically terminate the partnership.
• Illegality Where it is illegal to carry on the business of a partnership, the partnership will dissolve.
• Court order for dissolution The court has the power to order dissolution on various grounds. This is unusual because most partnerships can be dissolved without court intervention.

Downsides of Dissolution of Partnership

The principal downsides of dissolution are normally as follows:

• The partners’ income tax is normally accelerated by a year, subject to any overlap relief to which individual partners may be entitled.
• Redundancy/lieu of notice payments may become payable to staff.
• Liabilities may arise from leases that cannot be assigned or can only be sub-let at an under-rent.
• Ongoing storage of files and papers(not underpinned by ongoing income).
• Costs of recovery of unpaid fees, or loss of unpaid fees, particularly where clients decide to try to avoid payment in the hope that a firm that ceases to trade may not bother to/be in a position to sue for fees and/or based on alleged breach of retainer arising out of cessation of services/inadequate service following the dissolution.
• In the case of a firm of solicitors, if there is no successor firm for insurance purposes (e.g. a firm with which the dissolved firm merges) then the dissolved firm must purchase (six years’) run-off insurance, typically at a premium of between two and three times last annual premium.

For so long as the firm continues to trade these downsides may not materialise, and can be avoided altogether at any stage if all of the partners agree to an (often back-dated) retirement of the partner who served the notice, or other form of acquisition by the “continuing” partners, thus bringing about a technical dissolution only, which does not lead to the downsides listed above.

Disposal of Business after Dissolution

If the partners cannot agree that some of them will continue the partnership business and purchase the outgoing partner’s share, it will be necessary for there to be a disposal of the business and for the proceeds of sale to be used to pay off creditors, and then to pay to the partners the amount to which they are entitled.

Date Partnership Ceased

The date the partnership ceased should be the date on which it became legal that the partnership was dissolved. This is usually the date on which any buy out or other legal activities occurred such that the partner who left the business ceased to have legal rights or responsibilities to it. Details of how the dissolution occurred are not needed for the content of a letter advising of the dissolution of a partnership.

Notification of Dissolution

When a business partnership dissolves it is appropriate to let everyone who does business with the entity know about the resulting changes. Legal professionals can provide details of legal obligations to let others know about this dissolution, but less legal notification may also be appreciated by those who have done business with the organisation. Such a letter should indicate the date on which the partnership ceased, who left the partnership and who has assumed responsibility for the business and its outstanding obligations.

Net Lawman’s Dissolution of Partnership Agreement Templates

Our Agreement to Dissolve a Partnership has been professionally drafted by expert team of Solicitors and Barristers to be simple to use in your favourite word processing program. our partnership dissolution contract is available for immediate download and you can use this template time after time, simply insert the correct information in the relevant places. Our partnership dissolution agreement includes the following provisions –

• Termination of Partnership
• No Further Business
• Inventory and Statement of Account
• Determination of Partnership Interests
• Distribution to Partners
• Arbitration
• Mutual Releases
• Agreement Binding
• Amendment
• Waiver Of Contractual Right
• No Representations
• Interpretation
• Advice Of Legal Counsel
• Invalid Provisions
• Further Assurances
• Entire Agreement
• Applicable Law

Our Partnership Agreement Templates are written in plain English with important explanatory notes, and are regularly updated to comply with current legislation of Scotland.

Article Source: sooperarticles.com/business-articles/dissolution-partnership-510172.html

About Author:

Paul Johns working for Net Lawman Ltd – an English company operated by Andrew Taylor, for providing best quality legal documents. Relevant resource: franchise agreement, share sales and health and safety policy.Author: Paul Johns