How To Terminate / Dissolve A Business Partnership

What is a business partnership?

A partnership is a type of business structure whereby two or more partners take joint personal responsibility for the ownership of a business, including any losses and liabilities incurred, and share any profits made. A business partner can be a real person or a legal person (e.g. a limited company). Famous examples of business partnerships in the UK include NotOnTheHighStreet.com and Mumsnet.

Why do business partnerships come to an end?

Business partnerships may come to an end for a range of reasons, including:

• Disagreement – business partners may disagree on the future direction or running of the business
• Family reasons – one business partner may want to step back from the business to focus on raising their children
• Time to move on – business partners may wish to start up a new venture
• Health reasons – one partner may be unable to continue running their side of the business
• Sale – one business partner may decide to sell their side of the business to a new partner

Before a termination, it may be beneficial to resolve disputes before taking the actions for dissolving the partnership. For more information, check our our articles on ways to avoid business disputes and how to resolve business dispites the painless way. Depending on the circumstances of the business termination, the business may continue to operate with a new partner in place (a technical dissolution), or the business may be wound up entirely (a general dissolution). In this article, we will focus on the process of business partnership dissolution. 

How to end/ terminate a business partnership (dissolution) 

The first port of call when assessing how to proceed with a business dissolution is your partnership agreement. A well-drafted partnership agreement should clearly specify how important matters should be handled, including:

• Admitting a new partner – such a clause will normally confirm that no person may become a Partner until they have agreed in writing, in a form approved by the Partners
•  Continuance of the partnership – a clause may clarify that when a partner ceases to be a partner for any reason or a new partner is admitted, then unless the continuing partners decide otherwise, the partnership will continue on the terms of the agreement.
• Dissolution of the partnership – a clause of this type will normally specify that dissolution cannot occur unilaterally and that the partnership will not automatically if one of the partners dies, allowing their share to be charged in accordance with the Partnership Act 1890. Such a clause will also normally state that in the event of dissolution, the partnership should be wound up and the assets and liabilities handled in accordance with the Partnership Act 1890.

Importantly, business partnership agreements often include a dispute resolution process to enable matters of contention between partners to be resolved. By ensuring that a well-drafted and comprehensive agreement is in place from the outset, key events such as the termination of the partnership can be handled smoothly and amicably. For more information on business disputes, check out our page on Business Disputes Solicitors.

What if there is no partnership agreement?

If there is no partnership agreement in place, you will need to refer to the dissolution process defined in the Partnership Act 1890. Section 32 of the Act states,

“Subject to any agreement between the partners, a partnership is dissolved—

• If entered into for a fixed term, by the expiration of that term:
   
• If entered into for a single adventure or undertaking, by the termination of that adventure or undertaking:
   
• If entered into for an undefined time by any partner giving notice to the other or others of his intention to dissolve the partnership. In the last-mentioned case, the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice”.

Subsection C confirms that a partnership can be dissolved simply by function of one partner giving notice of their intention to dissolve the partnership. The Act also outlines the process of dissolution and the handling of any remaining assets and liabilities (including the order these should be done), as follows:

• Payment of all debts and liabilities incurred by the partnership
• Payment of any advances to each partner
• Payment of any capital to each partner, and

Any residue should be divided among the partners in the proportion in which profits are divisible.

Final words

Undoubtedly, the best way to bring an end to a business partnership amicably is to plan ahead and include sensible provisions in the partnership agreement. Of course, this is not always the case, and many business partnerships come to an end without a suitable agreement in place. In any event, it is important to seek expert legal advice early on in the process, whether to resolve an ongoing business dispute or to represent your interests if dissolution cannot be avoided. 

Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey. We have a highly experienced team of commercial and business dispute Solicitors who can assist you with any legal matter, including the dissolution of your business partnership. To make an appointment, please contact us or call us on 01932 840 111.