Dissolution of Partnership
A partnership is an association of two or more persons who carry on as co-owners of a business for profit. Sometimes a partnership breaks up or dissolves. Dissolving a partnership is a lot like getting a divorce. Partners may start out as friends with the best intentions but then something happens that causes one or more of the partners to want to break up the relationship. It is important to know that a partnership is personal and consensual in nature and therefore will continue only so long as the partners agree.
Reasons a Partnership May Be Dissolved
A partnership may be dissolved for any number of reasons, including:
- A partner no longer wishes to continue with the partnership.
- Upon the occurrence of an event agreed to in the partnership agreement resulting in the winding up of the partnership business.
- Upon the occurrence of an event which makes it unlawful for all or substantially all of the business of the partnership to be continued.
How Can Partnership Be Dissolved?
At Will Partnerships
In general, where a partnership is one at will or for an indefinite term, any partner may dissolve it at any time for any reason without the permission of his or her co-partners. This is accomplished by giving notice to all the other partners of his or her intention so to do. A partner may exercise the right to dissolve such a partnership for any reason which he or she deems sufficient. The decision may be entirely arbitrary, and yet, the partner is not liable for damages which result to his or her co-partners by reason of such action.
Dissolution of a partnership entered into for a definite term or a particular purpose which remains uncompleted before the expiration of its term or the completion of its purpose violates the partnership agreement and constitutes a wrongful dissolution. A statutory enumeration of the causes of rightful dissolution where the agreement is for a definite term makes wrongful a dissolution for any causes other than those enumerated.
What Happens to the Profits When a Partnership is Dissolved?
In winding up a partnership’s business, the assets of the partnership, including any contributions of the partners required, must be applied to discharge the partnership’s obligations to creditors, including partners who are creditors. Any surplus must be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions.
Upon dissolution, all partnership profits should be divided among all the partners, unless the right to participate has been disposed of or forfeited, and in the absence of a contrary agreement, all share equally. A partner is entitled to a share of the net profits of the partnership from pre-dissolution contracts for the entirety of their terms but is not entitled to a share of any profits flowing from contracts a former partner enters into after the partnership dissolved. Moreover, Profits distributed on dissolution are generally required to be distributed in the proportion in which the partners share profits during the life of the partnership under their partnership agreement. Absent proof of a contrary agreement, all partners share equally in profits on dissolution.
What Happens if One Partner Leaves the Partnership and the Other Partners Wish to Continue With the Partnership?
It’s possible for one partner to withdraw from the partnership and for its other members to carry on. Where a dissolved partnership continues, the withdrawing partner is entitled to his or her share of profits through the date of dissolution and to interest or a share of profits proportional to his or her interest in the partnership’s assets used to produce the profits through the date of settlement. However, the outgoing partner’s right to participate in the management and conduct of the partnership business terminates, except for duties associated with winding up the partnership if the dissociation. Furthermore, the withdrawing partner is not entitled to a share of profits earned after he leaves. This makes sense since the retiring partner no longer takes on the same shared risks after dissolution and thus he should not be entitled to receive profits in the same ratio as if he or she were still actively contributing to the partnership.
Litigation Over Partnership Disputes
Because the right of a partner to dissolve a partnership is unequivocal, issues can arise with respect to whether the partner’s dissolution was wrongful and how the profits and valuable property of the partnership should be divided. It is not uncommon for partners to file a Complaint seeking to dissolve the partnership, wind up its affairs, and force the sale of its property and distribute its profits when the partners are unable to agree. An experienced Miami business lawyer should be retained to protect your rights in partnership disputes to ensure that you receive the maximum amount you are entitled to under the law.
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