What Happens When Dissolving a Partnership

what happens when a partnership dissolves

Not all partnerships end the way business owners want, so it is important to know what happens when dissolving a partnership. Even if your relationship with your partner(s) has proceeded smoothly for most of your partnership’s existence, there may come a time when the partnership has outlived its purpose or circumstances have significantly change.

In this article we will discuss the steps to take during the dissolution process, some of the risks involved in choosing generic partnership agreements, potential disputes that may arise during dissolution, the cons of partnership litigation, and the necessity of partnership litigation.

Understanding the Legal Process for Dissolving a Partnership

There are times when you may decide that the best course of action is to dissolve your partnership. Other times, the decision may be made for you, such as when a court orders the dissolution of a partnership because the partners are no longer capable of working together. In other words, dissolution could be something that you choose on your own or something you have no choice about.

Dissolution could be something that you choose on your own or something you have no choice about.

Even when partners decide they no longer wish to be in business together, the partnership still continues to exist. There is a legal process that must take place before the partnership dissolves. During this process, you will need to be careful because you could end up personally liable for the actions of your other partner(s).

Risks of Using Generic Partnership Agreements

Hopefully, you worked with an experienced attorney before you signed the partnership agreement. The lawyer would have likely given careful consideration to the dissolution clause so that it would help you in your specific circumstances. That said, a partnership agreement cannot account for every single contingency. Moreover, some people may have tried to save money by using an “off-the-rack” partnership agreement that does them no favors and does not give any helpful guidance on dissolution.

Steps During the Dissolution Process

Once dissolution is agreed upon, or ordered by the court, there are several steps that you need to take to actually wind down the affairs of the partnership, including:

  • Reviewing your permits and business registrations and terminating your licenses as necessary
  • Filing the final federal and state tax return for your business and notifying the relevant authorities that you are dissolving your partnership
  • Reviewing your partnership’s contracts to see if they can be terminated, or if you need to have special negotiations with the counterparties to wind them down
  • Paying all outstanding debts and liabilities
  • Closing your partnership’s accounts

You also need to go through the actual process of dissolving your partnership with the state where it is registered. A commercial litigation attorney who is familiar with Texas partnership law can assist with the actual paperwork. Your lawyer would also review your existing contracts to see if there are any additional steps that you must take to end them.

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Review the Terms of the Agreement and Talk to the Other Partner(s)

Before deciding to dissolve your partnership, first speak with your other partner(s) to discuss the pros and cons of a dissolution. It could be that you are on the same page, so dissolution would be a matter of executing the steps laid out in the partnership agreement and handling the administrative matters of winding down the business. In a situation where there is no disagreement, you and your partner(s) can proceed directly to the dissolution.

In a situation where there is no disagreement, you and your partner(s) can proceed directly to the dissolution.

You will next have to review the language of your partnership agreement. The document may lay out specific steps that you and your partner(s) will have to take given your situation.

Possible Disputes During the Dissolution Process

There are several potential issues that could arise regarding a dissolution clause:

  • The clause in the agreement may be bare bones or off-the-shelf, and it may not cover your specific situation
  • There may be different interpretations among you and your partner(s) about the language of both the dissolution clause and the larger partnership agreement
  • The partners may differ on how to execute the language in the dissolution clause and have different opinions about the actual process

Cons of Partnership Litigation

A dissolution can often become a negotiation among partners. They may have different viewpoints of what must be done. You should begin the dissolution process by getting clear about what your position is regarding the future of the partnership and what you want to happen. You should also be familiar with the language of the partnership agreement and how you interpret it in advance of any discussions with your other partner(s).

Ideally, the partners can work together to execute the steps specified in the partnership agreement, including meeting frequently and keeping their lines of communication open. If they have trouble speaking directly, they could communicate through their attorneys. Your lawyer may recommend that you pursue mediating the dispute if you and your partner(s) have trouble communicating with each other substantively and voluntarily.

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The Necessity of Partnership Litigation

You May Have No Choice but to Litigate

In the best-case scenario, the parties will reach an agreement about dissolution. They would then proceed to draft a dissolution agreement that lays out the steps that will happen. You should carefully review any agreement before you sign it. Preferably, you should have an attorney draft the language of the agreement and/or review the agreement if another lawyer drafted it.

But if the partners cannot come to an agreement or work together, they can apply for a court-ordered dissolution. The judge can set the terms of the dissolution. Litigation can be expensive, and you would cede all control of the dissolution to a judge. You are taking a risk if you opt for litigation, but it may be necessary. In some cases, the judge could decide that the remedy to a business conflict between you and the other partner(s) is dissolution without you or the partner(s) demanding it. Courts may see that a group of partners just cannot work together, and they could act to put an end to the partnership.

How an Attorney Can Help You During the Dissolution Process

If you are involved in a partnership and have any legal issues, you should get the help of an experienced partnership attorney. Getting legal help early in the process can help you avoid some common pitfalls that can lead to litigation. Your attorney can do the following to help you with your partnership disputes and/or partnership dissolution:

  • Review the language of the partnership agreement to determine your rights and obligations
  • Help you act in the interim to protect yourself from liability
  • Negotiate with the attorney(s) representing the other partner(s) to help carry out the dissolution
  • Take your case to court if you cannot reach an agreement, so the judge can decide any disagreements
  • Negotiate and deal with creditors if you have any outstanding debts
  • Provide you with practical and timely advice, so you understand the dissolution process and its impact on you and your interests

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When a Partnership Dissolves Contact The Attorneys at Berg Plummer Johnson & Raval, LLP

Get the Legal Help You Need

The partnership dispute attorneys at Berg Plummer work with business owners when they have potential litigation. We get involved at the beginning of the process to help you pursue the best possible result. Contact the Houston commercial litigation lawyers at Berg Plummer today if you have any partnership issues that require the help of a knowledgeable business attorney.