What do I do when I want to get out of a partnership?

Sometimes people change, the industry changes, or the market changes and what was once been a profitable and effort worthy business is now the bane of one’s existence.  When partners cannot amicably agree on how to end a partnership, what are the options for one partner to bring about the termination of the business.

 

Hopefully, before you started your business, you thought about the possibility and means of dissolution and have put provisions into the partnership agreement to deal with it smoothly.  One such possibility is a buy-sell agreement, or what some call a shotgun clause.  One partner offers a price to buy out the interest of the other partner.  The second partner then has the right to either accept the offer, or buy out the first partner at the price offered by the first partner.  This ensures that the original offer will be for fair value and or will give the offeree a good deal for ownership of the other’s share.

 

Absent a specific provision for dissolution in the partnership agreement, there are a couple of other ways of dissolving a partnership.  The Uniform Partnership Act provides that a partnership may be dissolved “By the express will of any partner when no definite term or particular undertaking is specified.”  This would allow for the assets to be sold and the funds distributed evenly between the partners.   Potentially this would force the remaining partner to offer a reasonable price for his share of the partnership assets, if the remaining partner wants to keep the business going.  But the ability of one partner to buy out the other is not always possible.

 

If one partner does not want to sell the assets, buy their partner’s interests, nor sell their own interest, the last resort would be to sue for a judicial dissolution in court.  The general rule is that the trifling and minor differences and grievances that involve no permanent mischief will not authorize a court to decree a dissolution of a partnership.  However, §32 of the Uniform Partnership Act states that a business may also be dissolved by judicial decree whenever… “(c) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business, (d) A partner willfully or persistently commits a breach of the partnership agreements, or otherwise so conducts himself in matters relating to the partnership business that is is not reasonably practicable to carry on the business in partnership with him,…(f) Other circumstance render a dissolution equitable.”  Thus, when one partner’s persistent acts provoke dissention and disagreement between the partners, and make it impossible for them to carry on the partnership business, the provoking partner cannot insist on the continued operation of the business to the detriment of the non-provoking partner.

 

The power of dissolution must be done in good faith however.   A partner at will is not bound to remain in the partnership, regardless of the profitability or unprofitability of the business.  All partnerships are entered into in order to be profitable, but that alone does not require that a partner stay in the partnership until the business becomes profitable or all losses have been recovered.  A partner may use adverse pressure to freeze out a co-partner or otherwise appropriate the business for his own use.  Thus full and fair compensation for a partner’s ownership interest is required to properly dissolve the business.

 

Photo By: Moyan Brenn