If you are starting up a new business partnership, especially if this is with a friend or family member, planning for what happens if that partnership does not work out may not be the first thing you consider. However, it is vital not to overlook the potential risks involved and that you understand all the legal implications of entering a business partnership or limited liability company (LLP). One of the most important tasks when setting up a business with someone else, even with someone you trust, is to put in place a signed partnership agreement. Furthermore, understanding how to properly dissolve a partnership agreement, especially if there are regulatory or tax issues to consider, can protect those involved from complicated, lengthy, and costly legal disputes.
This article looks at some of the most frequently asked questions regarding the dissolution of a partnership or LLP and an overview of some of the main steps involved.
WHAT IS THE PROCESS OF DISSOLVING A BUSINESS PARTNERSHIP?
If you need to dissolve a business partnership, the process involved will depend on what type of partnership it is – a standard business partnership or a limited liability partnership (LLP) – and if there is a signed partnership agreement in place. If there is a partnership agreement in place, it should include circumstances under which the partnership can be dissolved, and the consequences of doing so, including how the business will continue should it need to. If the company is an LLP, partners can leave without disturbing business operations. Still, a standard partnership will automatically end unless specific conditions have been set down in the Partnership Agreement. If a partner wishes to leave, they should generate a written notice of dissolution and serve it to the other partner(s).
How assets and liabilities will be divided should be set out in a partnership agreement, along with how trading is to be wound up when the business ceases. A good partnership agreement should also outline a dispute resolution process, making the process more straightforward if followed.
However, if a partnership agreement is not in place or it does not deal with the subject of dissolution, the Partnership Act 1890 will apply, and partners will be expected to share all the profits of the partnership equally. Each partner must also register with HMRC for self-assessment.
WHAT ARE THE DIFFERENT TYPES OF PARTNERSHIP DISSOLUTION AND WHAT STEPS ARE INVOLVED?
In the UK, there are two different ways to dissolve a business partnership:
· General dissolution – If all partners agree to end the partnership if, for example, the business is no longer financially viable, the most appropriate course of action is to have a general discussion with all involved about winding up the business. If the business is to be closed, you will need to follow specific procedures, including collecting any monies due, notifying suppliers, customers, debtors, employees, creditors, HMRC and any other affected parties. Before sharing any money between the partners – according to their stake in the business – you must ensure that you settle any liabilities. The Partnership Act 1890 sets out a strict order in which you should complete these tasks.
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Technical dissolution – If a business intends to continue if it is still financially viable, but one partner wishes to leave and extract their share/financial stake of the business, they can perform a technical dissolution. In this case, there will usually be no break in the partnership’s business, with the new firm taking on the assets and liabilities of the old. You will need to produce termination accounts for the dissolved partnership that cover accounts up to the date the partner departs and create new accounts for the new partnership/sole trader from day one. Legally and from an accounting point of view, you will now be trading as a new business.
In both cases, it is essential that you understand your obligations and follow the processes correctly to ensure all parties involved are protected moving forward.
HOW DO YOU DISSOLVE A PARTNERSHIP THAT DOES NOT HAVE A SIGNED PARTNERSHIP AGREEMENT?
If your business does not have a Partnership Agreement in place, the rules of The Partnership Act 1890 will be in effect. Under these rules, the partnership will automatically be dissolved if one of the partners gives notice that that they are leaving. There is no obligation to supply a reason for leaving and this can be with immediate effect. A partnership can also be automatically dissolved, but only if various factors apply, including:
· One of the partners goes bankrupt
· One of the partners dies
· The partners have an agreement to conduct the business for a fixed period and that has come to an end
· The completion of a particular project or task which was the main purpose of the partnership
· It becomes illegal to continue to operate the business of the partnership – such as regulatory or legislation changes impacting the business
· Where one or more of the partners apply for a court order for dissolution.
It is always advisable to have a correctly drafted Partnership agreement in place that includes details regarding dissolution. Although the Act provides a comprehensive framework to govern a partnership, the general provisions of the Act may not be appropriate for your business or protect your best interests.
PARTNERSHIP DISSOLUTION DISPUTES
Disputes are not uncommon when a business partnership ends. Disagreements may occur if you cannot agree with your fellow partners what assets are partnership property or to be repaid into the partnership following dissolution. Disputes can also arise if one or more partners are blocking an effective winding-up from taking place. Ideally, your partnership agreement will set out the dispute resolution process should disagreements arise. Without one, dissolution disputes can become more complicated, lengthy, and potentially involve costly court proceedings as establishing “who owns or is responsible for what” at this stage can be challenging.
Along with many other benefits, having a partnership agreement in place in this context would therefore seek to minimise costly disputes. From the onset there will be documented evidence as to what was agreed between all parties.
Regardless of your position, seeking early legal advice is essential, especially where the relationship between the other party has broken down. Our legal team can advise on dissolution negotiations, with guidance on resolving matters by agreement or alternative dispute resolution techniques. Where this is not possible, we provide robust litigation services and can represent you in the courts if need be.
COURT INTERVENTION
Partners can ask a court to intervene if they cannot reach an agreement concerning the dissolution or winding-up of the partnership. The court can clarify whether the partnership has been dissolved and, if so, on what date. The court determines what the assets of the partnership are, what partners must repay to the partnership, and intervene to ensure that the winding-up proceeds effectively.
PARTNERSHIP DISSOLUTION LEGAL ADVICE
Our experienced corporate solicitors provide specialist advice and assistance with a full range of partnership legal issues and disputes. We will work with you to find the most appropriate, commercially astute way to terminate a partnership that protects your best interests
We advise and represent clients in various forms of dispute resolution including proceedings before the English courts and various tribunals and arbitrations. We also negotiate compromises and arrange and advise in alternative dispute resolution processes such as mediation.
Our solicitors can also draft partnership agreements, whether you have been operating as a business for some time or if you are just starting up.
Our office is only five minutes away from Charing Cross and Embankment Stations, just south of Trafalgar Square. Being situated in the heart of London’s West End, we are easy to reach. Call us on +44 (0)20 7925 2244 or email us at office@plslex.com.