Business partnerships, like marriage, do not always end as expected. Some business relationships work as well as one may hope, and the business thrives. Others become contentious, and partners realize it is best to go their separate ways.
Which leads to one big question — how do business partners dissolve the partnership?
Partnerships are generally legal relationships. These are business structures that result from drafting legal documents and filing them with the government, creating legal entities that do not typically end on their own.
If you need help ending a business partnership, Weiner Law Group LLP can help. We can guide you through how to end the business relationship wisely with the help of a business divorce attorney. Set up a consultation today.
How to End a Business Partnership
To end your business relationship wisely, follow relevant regulations and consult your lawyer throughout the process. Three common ways to end a business partnership include:
- Buy out or sell to a partner,
- Remove an owner, or
- Dissolve.Â
At the initial stage, decide whether you want to continue being involved with the business. If you want to stay with the business, consider buying out a partner or, if necessary, removing them. If you are ready to walk away, consider selling your interests in the partnership or dissolving it. Your partnership agreement will play a large role in the process, so review it carefully.
How To Sell To a Partner or Buy Out Their Interest
Ideally, your business partnership agreement includes a comprehensive buy-sell provision, which should provide guidance on how to move forward. If you do not have a buy-sell agreement, you and your partners should agree upon an acceptable process before moving forward.
To start the sale process, you generally need to request a business valuation. With that valuation, you can negotiate terms and prepare documents to make the sale official. Then, you sign the documents and decide what to do with the profits.
How To Remove a Partner
If your primary complaint is that a partner is behaving poorly, you may be able to remove that partner through dissociation. Because it is more aggressive, you typically only remove a partner after attempting more informal processes.
You may expel a partner by following any expulsion procedures laid out in your partnership agreement. If your agreement does not address expulsion or provide a specific process, you may expel a partner in several circumstances. Generally, you must buy out the interests of a partner that you expel.
Unanimous Vote of Other Partners
You may expel a partner through a unanimous vote if:
- Continuing the partnership with that partner is unlawful;
- All or substantially all of that partner’s interests in the business have been transferred, or a court orders that all their interests be transferred; or
- The partner is a corporation or partnership that is ending.
This option may be more or less practical depending on how many partners you have.
Court Order
A court may remove a partner if the partner:
- Engaged in wrongful conduct that caused a material, adverse effect on the business;
- Willfully or persistently materially breached the partnership agreement; or
- Engaged in partnership-related conduct making it unreasonable to continue the business relationship.
If the partner refuses to leave, you can go to court and explain what they have done to harm the business, being as specific as possible.
Circumstances Surrounding the Partner
Additionally, you may expel a partner if they:
- Go bankrupt,
- Assign property to benefit creditors,
- Do not prevent attachment by a creditor to all or substantially all their property,
- Die,
- Are placed under a conservatorship, or
- Are declared incompetent in a court order.
Obtain legal proof before expelling the partner.
How to Dissolve a Business Partnership
You and your business partner can also agree to dissolve the business. This process generally involves drafting a dissolution agreement and then following through with the terms outlined in it. As you create the agreement, consult your business divorce attorney to ensure the agreement complies with New Jersey law on how to dissolve a partnership.
Legal Reasons For Dissolution
Under New Jersey law, you may dissolve a partnership in several situations:
- Consent — partners may vote to dissolve the business;
- Withdrawal of other partners — when other partners withdraw, a majority of remaining partners must typically consent to continue the business;
- Completion or impossibility of business’s purpose — businesses organized for particular purposes may dissolve upon completion of the purpose or the purpose becoming impossible to complete;
- Completion of business’s term — businesses created for a set period of time may dissolve after that time passes;
- Occurrence of certain events — you may dissolve a partnership if an event specified in the partnership agreement occurs or an event makes continuing unlawful; or
- Court order — a partner may request a court determine that the economic purpose of the business has been or is likely to be unreasonably frustrated, another partner has engaged in conduct making it unreasonable to continue the partnership, or it is impractical to continue the business while complying with the partnership agreement.
Getting the consent of all or a majority of partners typically makes for a smoother dissolution, but going to court may be just as effective. Before you go to court, consider the effect a court case may have on the relationship between you as individuals and on any future business relationships.
Dissolution Steps
To dissolve your partnership, complete the following steps:
- Discuss dissolution with your partners — open a dialogue with your partners to see what their opinions are on ending the business;
- Negotiate terms of dissolution and create a dissolution agreement — work with your partners and attorneys to reach terms you are comfortable with;
- Begin winding down your partnership — notify others that your partnership is dissolving and begin making arrangements;
- File official dissolution paperwork — file official dissolution paperwork with the State of New Jersey and the federal government;
- Finish winding down your partnership — close out open issues and complete any remaining contracts; and
- Distribute partnership assets, settle partnership debts, and close business accounts — transfer anything in the partnership’s name away and close any accounts the partnership holds.
When the partnership gets truly contentious, you may need to file a court case to reach the final terms of dissolution.
Consult a Business Divorce Lawyer
Additional legal issues can arise during the dissolution of the partnership agreement, like tax obligations. To ensure you meet all legal requirements, seek legal counsel experienced in the termination of partnerships, like the business divorce attorneys at Weiner Law, to help navigate the process and minimize the risk of surprises.
Contact Weiner Law Group LLP to discuss how to end a business partnership with an experienced, knowledgeable attorney.