There are many different reasons why you might decide it’s time to dissolve a partnership. You might be unable to reach an agreement with your partner about the direction the business should take or struggle to agree on how to best manage its finances. Alternatively, one partner may decide to go on to something new or retire so a new business must be formed without them.
If one partner chooses to leave the partnership, the remaining partner(s) can continue running the business as a sole trader or a partnership as before. However, technically, the old partnership will have to be dissolved and a new one formed.
Whatever the reason for wanting to dissolve the partnership, the good news there is a relatively simple and cost-effective way to do it. If the partners are able to proceed amicably then dissolving a partnership can be very straightforward. However, complications can occur when they are in dispute.
In this guide, we’ll explain the different ways to dissolve a partnership and take you through the process step by step so you know exactly what to expect.
The importance of having a partnership agreement in place
The partnership agreement that you created when the business was formed has an important part to play in determining when a partnership can be dissolved and the consequences of doing so. A partnership agreement allows the process to be clearly defined and reduces the likelihood of disputes.
The agreement should explicitly set out the events that can lead to the dissolution of the partnership. Some of those events might result in the automatic termination of the partnership, while others may lead to a right, rather than an obligation, to dissolve it.
However, there’s not always a partnership agreement in place or it may not deal with the subject of dissolution, in which case, the Partnership Act 1890 will apply.
Dissolving a partnership when there’s no partnership agreement in place
Under the rules defined in the Partnership Act, a partnership can only be dissolved automatically if any of the following apply:
- A notice of termination is served by one of the partners;
- The partners agreed to conduct business for a fixed period of time and that period has ended;
- The partnership was formed to complete a specific project and that project has been completed;
- One or more of the partners is bankrupt or has died;
- It’s illegal to carry on the business of the partnership – for example, if the activities of the business were legal when the partnership was formed but a law change has made them illegal;
- Where one or more of the partners apply for a court order for dissolution.
If you do have a partnership agreement in place, it may well include other circumstances under which the partnership can be dissolved, so always check the terms of the agreement you have entered into.
It’s worth noting that there’s no clause relating to the retirement of a partner in the Partnership Act. That means, unless there’s an express clause that covers retirement included in your partnership agreement, the only way to terminate the relationship is for the retiring partner to give a notice of dissolution to the other(s).
The two types of partnership dissolution
There are two ways to dissolve a partnership in the UK:
- General dissolution – If the business is no longer financially viable and the partners want to end the partnership and close the business down, a general dissolution to wind the business up is likely to be the most appropriate course of action. The business will then cease to exist.
- Technical dissolution – If the business is financially viable but one partner wants to extract their share of the business in cash while allowing the business to continue, they can perform a technical dissolution. In this case, there will usually be no break in the business of the partnership, with the new firm taking on the assets and liabilities of the old.
Both general and technical dissolutions become more complicated if the partners are in dispute. That’s because taxes and other financial issues can be fought over, which can lead to lengthy and potentially costly court proceedings.
What is the process to dissolve a partnership?
The first step in dissolving a partnership is for one partner to serve a written notice of dissolution to the other partner(s). Once the notice of dissolution has been served, the firm does not necessarily need to cease trading immediately. That’s because the business still has a duty to its clients and customers to complete any ongoing work or contracts. Continuing to trade will also help to maximise the value of the business for the benefit of all partners, whether it’s to be sold as a going concern, continued by one or more of the partners or closed down.
- General dissolution – In the case of a general dissolution, where the business is to be closed down, you should begin the process of winding up the partnership by notifying suppliers, customers, debtors, employees, creditors, HMRC and any other parties that will be affected and collect all the monies due. You must also settle any liabilities before the rest of the money can be shared between the partners according to their stake in the business. There is a strict order that these tasks must be completed as set out in the Partnership Act 1890.
It’s important to note that until the winding up of the firm has been completed, the partners at the date of the dissolution remain partners and have a continuing duty of good faith to one another. They also have the continuing ability to bind one another to contracts with third parties for the purpose of winding up.
- Technical dissolution – In the case of a technical dissolution, where one or more of the partners wants to continue running the business, the name of the new business can remain the same. However, third parties such as suppliers, debtors and creditors must be informed that [business name] is continuing as a sole trader/partnership but without the presence of partner A. This is important as otherwise the departed partner could be treated as though he was still a partner and chased for the business’s liabilities.
To continue under the existing partnership name, one partner will essentially have to buy the other one out. That involves placing a value on intangible assets such as customer lists and the goodwill of the business. The departing partner is entitled to expect these assets to be purchased from the old partnership at a fair value.
You will also need to produce termination accounts for the dissolved partnership which are made up to the date the partner departs, and create new accounts for the new partnership/sole trader from day one. From a legal and accounting point of view, you’ll then start trading as a new business.
If your partnership is to be dissolved, there are a great many factors to consider. It must be decided how the assets will be liquidated and divided, who is responsible for collecting outstanding debts, how pay-outs to creditors will be made, who’ll have use of the business name and customer list in the future and how profits will be distributed. Failure to adhere strictly to the procedures set out in law can land you in court.
An insolvency specialist at AABRS will be able to guide you through the process, from serving a notice of dissolution through to paying creditors and distributing the proceeds from the sale of assets. Just get in touch today for a free, no-obligation consultation with our team.