Unlike a sole proprietorship, dissolving a partnership is not as easy as just ceasing the operations and leaving the rest of the partners. Several steps should be followed to ensure that that everything runs according to the law when dissolving the partnership. Here are some of the steps:
1. Reviewing the partnership agreement
It is important that partners have a document that outlines what should be done when one or more of the partners choose to leave. When leaving, you need to go back to the partnership deed and follow the protocol that you had agreed on.
All to often, the agreement doesn't exist - or isn't adequate. It's best to make this agreement when all is going well for the business, and relationships between business partners are at their most cordial. Partners should start every business partnership with the end in mind. The exit strategy needs to be clear. Start with end in mind, and how you will break it all apart.
Many former partners have remarked how important it is to figure out how the partnership is going to end before you even begin. Get a rock-solid partnership agreement in place. It's like a prenuptial agreement, but without the emotion -- it's just good business. O"When we started our business, we were so excited by the potential and the fast growth we were experiencing, not to mention how busy we were just keeping things moving forward, that we put the legal work on the back burner. Things went sour too fast to do anything about it", commented one victim of a partnership gone wrong. Have a clear buy/sell agreement, an agreement on how to handle debts. Consider:
- What if a partner decides to leave?
- What if a partner is causing damage to the business?
Decide how you'll handle things before there's a problem (in writing!), and it makes it much more clear and painless if (or when) something goes down. Another former partner offers: "Honestly, that would have taken care of any of the other residual issues that I might have advice on. That or just don't do a partnership. You don't have to dissolve from someone when you can just fire them!"
If there was no agreement in place, start with giving notice to your fellow partners of your intention to leave. A smooth dissolution is still possible, but somewhat unlikely.
2. Discuss the dissolution with the rest of your partners
Ensure that you are on the same page with all the rest. Discuss issues to do with liabilities, profits, and the amount you had invested in business among other things. Each of the partners should be willing to accept new ideas to reach an amicable solution. You must fulfill the obligations that you are given before moving on to the next step.
3. File the dissolution papers
While this is not required, it is a good practice to file a dissolution partnership form with relevant state authorities. This is a formal announcement that the partnership is ending. This announcement can protect you from future liabilities coming from the partnership.
4. Notify other publics to the partnership
Notify other people who work with the partnership. These includes the employees, the landlord, your clients, creditors, supplies and the relevant government entities such as the IRS (it affects your tax returns).
Give your notice early enough to these parties as required by the law to avoid legal and financial problems. It also helps in smooth closing down of the business.
5. Divide business assets
The partnership cannot be dissolved before all the accounts have been settled and dissolved. All credit and business debts take priority over other payment. You then divide the assets that are left amongst the partners in line with the agreement you had made.
Consider that there are many kinds of assets:
- legal entities,
- twitter accounts+ social media,
- pay per click accounts,
- analytics accounts,
- imagery, media & digital assets
- intellectual property
Be sure to get any payments up front when you split. Get more money at exit, instead of over time. Set payment structures. Get personal guarantees.
6. Settle any business debt
Business credit is often a mix of business and personal. Beware of early stage debt secured with personal guarantees, as these may cause the most - and sometimes unexpected - harm. After all, you can do far more damage than imagined to your credit. One former partner mentioned that 3 years later, he still is dealing with collections and personal guarantees; his credit is wrecked.
Dissolving a partnership is not the easiest of things. It is harder than getting a divorce. But according to divorce mediation service Split Simple, even splitting up family owned businesses can be accomplished with the right attitude. Other forms of business are easier and cheaper to dissolve than a partnership. If you are already in one, consider making it a corporation or s-corp, which are less risky and easier for you to get off when you want to leave.