Table of Contents
If you are a partner in a general partnership, you may want to bring the business arrangement to an end. The exact procedure to dissolve and wind up a partnership largely depends on the terms of the partnership agreement. This article will provide an overview of common circumstances where you and the other partners may decide to end the partnership. It will also explore how the law decides each partner’s entitlement to the partnership’s assets following its dissolution.
Dissolving and Winding Up in a Partnership
Dissolving a partnership involves the winding up of its assets, which the partners then distribute amongst themselves. However, not all dissolutions lead to the partnership being wound up. Therefore, it is worth distinguishing between a technical dissolution and a dissolution leading to a winding up.
Technical Dissolution
A technical dissolution is where the law formally treats a partnership as ended. This can happen even when the partners do not intend to dissolve the partnership. Commonly, this occurs when the partnership agreement is silent about what happens if a partner leaves the partnership. Absent any term in a partnership agreement, the partnership automatically dissolves any time a partner resigns.
General Dissolution
A general dissolution is when the partners dissolve the partnership with the intent to wind it up. We will focus on general dissolutions for the rest of this article, and any reference to a dissolution refers specifically to a general dissolution.
Methods of Dissolving a Partnership
The table below outlines the various ways you can dissolve a partnership.
| Unanimous agreement | Partners may dissolve the partnership by unanimous agreement. |
| Through an express power specified in your partnership agreement |
If your partnership agreement gives partners the power to dissolve the partnership under certain circumstances, you can lawfully wind up the partnership. For instance, the partnership agreement may grant founding partners the right to unanimously agree to wind the partnership up, even if other partners do not agree. |
| Where one partner engages in fraud or misrepresentation |
In certain circumstances, if one partner engages in fraud during the negotiation of your partnership agreement, you and the other partners can elect to “rescind” the contract, though you do not have to. The effect of rescission is that the partnership is dissolved and any assets transferred to the partnership revert back to the partners. |
| After the expiration of the partnership | Where a partnership is created with the express intent to last for a specific period, when the time elapses, the partnership automatically dissolves unless the agreement specifies otherwise. |
| Upon the bankruptcy or death of a partner | Unless your partnership specifies otherwise, the death or bankruptcy of a partner will automatically dissolve the partnership. |
| If the partnership’s principal business activities become illegal |
If the business the partnership engages in is unlawful, the partnership automatically dissolves. You can include a term in the partnership agreement that overrides this if you wish. |
| By a court order |
A court can order your partnership to be dissolved in several cases, including:
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Winding Up the Partnership
After a partnership has been dissolved, partners must initiate the wind up. In many cases, this process can last for weeks or months. In general, before the winding up process is complete, the partners must ensure that the partnership:
- abides by any on-going contractual obligation, such as to supply goods or services, unless the contract is amended;
- settles all debts it owes to its creditors; and
- returns each partner with the full value of their share in the partnership (accounting for any debts).
We will look at specific steps the law expects your partnership to take.
| Publication of the dissolution | Partners must publicise that the partnership is being dissolved. This is so creditors, such as its suppliers and lenders, are aware of the dissolution. |
| Return of premiums by incoming partners | If your partnership requires that incoming partners pay a joining fee, you must refund this fee upon dissolution. |
| Selling partnership property |
Partners are entitled to use any and all partnership property to settle the partnership’s debts. The proceeds of any partnership property you sell must be paid to certain individuals in the following order:
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Key Takeaways
Most partnership dissolutions result in a wind up, where the partnership assets are sold, and the proceeds are used to pay back creditors. Any remaining amounts are then distributed to partners according to their shares in the partnership. However, some dissolutions do not lead to a wind up, known as technical dissolutions.
For more information on how to wind up a partnership, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A partnership dissolution refers to the termination of the legal relationship between partners. It may or may not result in a wind up, depending on the intentions of the partners and the partnership agreement.
A wind up is where the partners sell the partnership assets to pay off the firm’s creditors. You would then distribute any leftover assets amongst the partners according to their share in the partnership.
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