Just as forming a business partnership under California law requires completion of certain tasks, ending a partnership is also a process. General partnerships, where there is no specific end date, must be dissolved using three basic steps. These steps apply when partners voluntarily agree to dissolve the partnership. Where partners cannot agree, legal action is typically the best way to resolve disputes over the dissolution process.
The first step is to review the partnership agreement. While a written partnership agreement is not required in California, if your partnership has one, it can make the dissolution easier. For example, the partnership agreement might cover the procedures for a dissolution, how debts are to be paid, and how remaining assets will be divided among partners. These two topics, settling debts and dividing assets, will form the core of the dissolution process. If the partnership agreement does not explain the process for resolving these financial issues, the default is to rely on California state law. Further, if there is a dispute over debts and assets, you may need to go to court so a judge can resolve any disputes.
The second step is to determine how to dissolve the partnership. If the partnership agreement provides a means for dissolution, you’ll follow the agreement. Failing to do so could create the opportunity for partners to bring breach of contract or other claims against each other. If only some, but not all, of the partners are interested in dissolution, the partners could agree to buy out the others, or come to another solution to resolve outstanding debts and distribution of assets. Without a partnership agreement, the partners would rely on state law, which generally provides that the partnership be dissolved by an affirmative vote from at least half of the partners, including partners who left the partnership within the preceding 90 days.
Finally, the partnership’s debts must be settled and the assets distributed. Thus, the partnership should see that all remaining work is completed, the outstanding debts are paid, and any remaining assets are distributed to the partners. Once the partnership has dissolved, it is a good idea to file a “Statement of Dissolution” with the Secretary of State. This confirms the partnership has ended and limits partners’ liability. The partners should notify clients and creditors of the partnership’s changed status, and resolve any outstanding tax issues. Because the tax issues can be complicated, it is a good idea to retain an attorney who can help with dissolution and tax questions.
For more information on business formation and dissolution, contact experienced business lawyer Drew E. Pomerance.