Entering into a partnership involves various risks, which, if not handled correctly, could lead to the partnership’s termination. A disagreement between the partners, lack of profits, or a simple loss of interest in the venture could all lead to a dissolution.
If you’re thinking of dissolving a partnership, here are the things you need to know.
Common reasons for ending a partnership
A partnership can end for various reasons. The most common of which are specified in Division 4 of the Partnership Act 1892 No 12 (NSW). These include:
- The expiration of a partnership’s term
- A partner serving notice of intention to leave
- The court deeming the partnership as illegal
- A partner’s death or bankruptcy
- The partnership becoming insolvent
- A court-order dissolution due to incapacity or unsoundness of mind in one of the partners
- A partner’s breach of the agreement’s terms
Whatever the reason behind the dissolution, the procedure for a partnership’s termination is dependant on the existence of a partnership agreement.
With an Agreement
Creating an agreement when commencing a partnership is crucial as it allows you to clarify important issues such as: how will the business be run; who will perform what tasks; what happens in the event a dispute arises; and most importantly, how to dissolve a partnership. You can also read more on how to create a partnership agreement, as well as terminating a partnership agreement.
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Without an Agreement
In the absence of a valid partnership agreement, or if the agreement is silent on dissolution, the governing legislation applies on the partnership. In that case, the legislation of the state where the partnership was formed and operates in applies:
- NSW – Partnership Act 1892 No 12
- ACT – Partnership Act 1963
- VIC – Partnership Act 1958
- WA – Partnership Act 1895
- NT – Partnership Act 1997
- QLD – Partnership Act 1891
- SA – Partnership Act 1891
- TAS – Partnership Act 1891
According to s 32, partners may dissolve a partnership:
- By the term of the partnership expiring ; or
- If the time is undefined, then by one partner serving a notice of their intention to dissolve the partnership to the other partner(s).
The partner must provide the notice in writing and the partnership will dissolve from the date specified on the notice. If no date is mentioned, the dissolution will take place from the date of communication of the notice. Additionally, in some cases, the court may give an order to dissolve a partnership as well.
Consequences
Dissolving a partnership is a long and difficult process. You should therefore take its consequences into consideration. You must ensure that the all the credit of the partnership is paid back. Each of the partners is also liable for the debts that the partnership incurs in their time as a partner. Similarly, the partners have the right to apply the assets of the partnership, such as the property, into the repayment of its debts. There are other aspects to consider too, such as tax liability and employee obligations.
Therefore, you should always consider creating a valid partnership agreement to cover these issues in detail. If you don’t have an agreement, or are unsure of the details, consult a joint-venture lawyer to make sure your interests are protected.
