A partnership is a relatively simple type of business structure that many people take on. It involves two or more people, or companies working together to make a profit. However, since it is one of the most informal and simple business structures to set up, often partnership agreements are neglected, resulting in issues when conflicts arise. Sometimes this means that a partnership needs to be dissolved.
In this post, we cover what you need to know if and when you are looking to dissolve a business partnership.
Why do people dissolve a partnership?
The dissolution of a partnership is when a business partnership structure is terminated or coming to an end.
Often, partnerships will need to come to end for any number of reasons. These could include:
- Disputes between partners about profits
- The day-to-day running of the business
- Misalignment about the long-term direction and strategy for the business, especially involving the finances.
What is important to highlight is that a partnership that is dissolved does not necessarily mean that the business will cease to exist. The business can continue to operate after dissolution; however, it could have a new business structure.
Ways to dissolve a partnership
While in most cases, the majority of partnerships are dissolved when one partner decides or agrees to leave the partnership, there are also plenty of other reasons a partnership could be dissolved including:
- the partnership term as stated in the formal partnership agreement expires;
- one partner gives written notice to the other partners to exit the partnership;
- one or more partners can no longer legally own a business;
- a court issues a court order to dissolve the business;
- a partner becomes bankrupt;
- one of the partners dies;
- the business is bankrupt or insolvent; or
- a court orders that the partnership ends.
How to dissolve a partnership
All dissolution of partnerships are subject to the legislation governing the state where the partnership was formed.
Ideally, partners should put in place a formal Deed of Dissolution of Partnership. This deed is incredibly comprehensive and covers several topics including, but not limited to:
- Conduct of the partnership between the dissolution date and the date of winding up;
- Sale, transfer or retention of partnership assets;
- How liabilities of the partnership are to be dealt with;
- Status of, and liability for, employees;
- Preparation of accounts;
- Payments to partners; as well as
If there is no partnership or dissolution agreement in place, the governing law of the state or territory will apply, often with a receiver appointed to close the business. If the business partners cannot agree, then it might be necessary to apply to a court for the partnership to be wound up. If this happens, it is important to seek legal advice from a lawyer.
After you have dissolved the partnership
Once the business has been dissolved, it is important that each partner remains liable for all business debts incurred while they were a partner of the business, along with any outstanding tax liabilities. If the business is intended to be closed, these debts must be fully cleared before the business is then deregistered with the Australian Securities and Investments Commission (ASIC). This step marks the formal closure of the business, if that is the option the partners have chosen to take.