A business partnership can be ended by either following the procedure defined in the partnership agreement, or otherwise through the manner defined by state legislation.
A partnership may end for a variety of reasons, both good and bad. No matter the reason, it is important to ensure your legal and financial obligations are covered. This article will get you across the process of ending a business partnership and alert you if you need to seek legal advice.
Option 1: I have a Partnership Agreement
A Partnership Agreement is essentially a contract between the partners detailing the terms of the partnership such as the division of tasks, the dispute resolution process and the dissolution process.
If you have a Partnership Agreement, then you are obliged to follow the dissolution process it stipulates. It will likely also provide for how the business’ assets are divided. In some circumstances, such as when it becomes illegal for a partnership to carry on business, the relevant state or territory legislation will apply, so it is important to read the following section, check the relevant legislation and seek legal advice if necessary.
Option 2: I do NOT have a Partnership Agreement, or my Agreement does not cover dissolution
If you do not have a Partnership Agreement or the Agreement does not cover how the partnership is to be dissolved, then the legislation (the Partnership Act) of the state or territory in which the partnership was formed and operates applies. The legislation will generally provide that a partnership dissolves when:
- The term of the partnership in the Partnership Agreement expires
- A partner wants to leave the partnership and gives written notice to the other partners
- The partnership becomes illegal
- A partner dies or becomes bankrupt
- The partnership becomes insolvent
- A court orders the dissolution of the partnership. If you believe your partner should no longer be part of the partnership for a valid reason, such as if they are of unsound mind, they are incapable of upholding their side of the partnership, they breached the Partnership Agreement or another valid reason, you need to apply to the court for the partnership to be dissolved.
Case Study: NSW
Section 32 of the Partnership Act 1892 No 12 (NSW), states a partnership can be dissolved by:
- The expiration of the term in a fixed term partnership
- The termination of the particular goal or purpose of the partnership, if it was entered into for that sole purpose
- By providing notice to the other partners (in an indefinite partnership) of the intention to dissolve the partnership
How to correctly give notice?
- Provide notice in writing
- Provide the date of dissolution (if no date is provided, the partnership dissolves immediately when the notice is given)
- You need to publish an advertisement in the Gazette and in one newspaper circulating Sydney and one newspaper circulating the area the partnership operates to give notice that you are no longer dealing with the business
What is happening with the business?
The dissolution of the partnership does not necessarily mean the end of the business. If the dissolution of the partnership is intended to end the business, then the business will need to be wound up and deregistered with ASIC. If the business is continuing under a new partnership, it may need a new ABN and TFN.
If you want to convert the business structure from a partnership to a company, the partnership needs to be dissolved first in order to set up as a company. Among other steps, it will be necessary to get a new ABN and TFN and transfer the business name to that ABN.
Other consequences to keep in mind
Debt: Partners are jointly liable for business’ debts incurred during their time as a partner.
Partnership assets: Partners have the right to use the assets of the partnership, such a property, to repay its debts. The sale, transfer or retention of partnership assets will need to be negotiated.
Tax consequences: There are tax implications when a business is closed or restructured. GST or CGT may be payable on the sale of partnership assets. It may be necessary to engage an accountant or tax adviser.
Employee obligations: You will need to consider obligations to your employees under their employment contracts.
Insurance and ongoing contracts: These may need to be cancelled or transferred into a new name.
The process of partnership dissolution depends on whether or not you have a Partnership Agreement. You’ll need to follow the process in your Partnership Agreement or otherwise the relevant state and territory legislation. Generally, partnerships will dissolve after the fixed term or following written notice. It is important to consider the consequences for the business as well as debt, property and tax implications.
If you need assistance dissolving a partnership, get in touch with us via the contact form or by calling 1300 337 997.