Key Considerations for Splitting Up Your Business Partnership

When a small business partnership no longer seems workable, it may be time to look into splitting up or dissolving the firm. A legal dissolution is the best way to protect yourself from future problems, such as liability for outstanding debts or the new business activities of an ex-partner.

If you have a partnership agreement already in place, it can be relatively easy to follow the outlined procedures and split up the business. If you did not draw up an agreement, you may need the help of a business lawyer to finalize plans.

Taking the High Road

Whether or not you have a partnership agreement, understand that dissolving a partnership can be stressful. Often, emotions run high. This may be the last straw after a series of contentious disputes, or one partner may have a personal or health issue that makes leaving the business necessary. In other cases, the business may be failing, and all partners are seeking a hasty exit.

Whatever the reason for your partnership dissolution, the goal should be to split amicably, if at all possible. When you keep lines of communication open and strive to treat all partners fairly,  you can usually resolve matters more quickly and easily. Circumventing disputes will also help you avoid litigation, which can be financially (and personally) draining.

Important Steps

If there are more than two partners in the business, the first step should always be a vote to officially dissolve the partnership. If only one of the partners wants out, the others will need to follow legal channels to move forward without him or her. This means settling up financially and restructuring the business.

When the partners discuss and resolve dissolution issues, it is crucial to put all agreements in writing. This includes individual responsibility for existing partnership debts as well as future liabilities. Keep in mind: if one partner does not pay his or her debt or later files for individual bankruptcy, the other partners remain vulnerable.

Whether you are restructuring or dissolving the business, it is important to notify all customers, vendors, creditors, and associates. If the business will close its doors, you should pay all debts and sell the assets, splitting the remaining funds equitably. If your partnership liabilities cannot be fully covered when you are ready to dissolve, a business lawyer should be consulted. Filing for Chapter 7 bankruptcy is an option if the business is insolvent, or Chapter 11 may allow you to regroup and reorganize for a fresh start.

Considerations for Shutting Down

Although you don’t have to file a legal agreement to dissolve a general partnership, it is wise to do so. Legal documents can protect you from future liabilities in case something changes and a dispute arises.

Filing a certificate of dissolution in the state(s) in which you have been doing business can also prevent problems. If you walk away without formally shutting down operations, you may still be liable for fees, judgments and other assessments levied against the company.  Dissolution papers notify the government, creditors, and all interested parties that you are no longer in business.

In addition to collecting assets, discharging liabilities, distributing property, and notifying key parties, the following tasks are highly recommended:

·         Pay employees in full on the last day of work.

·         Close all business bank accounts and credit cards.

·         Cancel unnecessary licenses and permits.

·         File final employment tax returns and make final federal deposits for the taxes.

·         File a business tax return for the year of dissolution.

·         Contact the IRS to close the employer identification number (EIN).

Once your business is dissolved, you can no longer carry on any business activities other than those needed to close out. As a final step, it is a good idea to publish a notice in your local newspaper. This provides additional, official notification to creditors -- and partners -- that no further business debt is to be incurred.


From the Author: Corporate Bankruptcy