Dissolving a Business Partnership
Maybe it’s time to retire, change careers, or close up shop. Maybe you can’t come to an agreement about where your business is headed, or how to manage it, or your children don’t wish to join your family business.
If your business partnership isn’t working out, it might be time to dissolve it. Doing so can be confusing, especially in Texas, where partnership law isn’t exactly the same as in other states. Below you can find a general idea of the questions to ask and the topics to address.
Consulting the Partnership Agreement
Before you go forward dissolving the partnership, we will look at your partnership agreement, the document outlining how the partnership makes decisions and resolves disagreements. Amending your partnership agreement—or adopting one, if you don’t already have one—could be a better solution than dissolving the partnership entirely.
Without a written agreement, profits and losses are generally divided evenly among the partners, and all partners are entitled to have a say in the business decisions of the partnership. You can use a partnership agreement to distribute these differently, having one partner take on more financial or other control, or more decision-making power.
If you decide to go ahead with dissolving the partnership, your partnership agreement should also have a lot to say about when and how this can be done. Often it will require a unanimous decision by all partners.
If one partner wants to end the partnership and another doesn’t, the agreement will often include procedures for resolving the disagreement, for example, by having one partner buy out the other(s). In general, partners should abide by what they agreed to in the partnership agreement. If one partner leaves the partnership in a way that violates the agreement, the remaining partner(s) can pursue or seek to recover any damages incurred by the departure.
Sometimes this will take the form of a lawsuit, other times this can take the form of a mediation or arbitration rather than litigation. It depends on the partnership agreement or other agreement of the partners.
If the partnership agreement doesn’t provide dissolution procedures, the situation is possibly the same as those without any written agreement at all. Without a written partnership agreement, you’ll have to rely on Texas partnership law, which may differ from laws in other states.
Texas law says that dissolving an at-will partnership requires the agreement of a majority-in-interest of the partners, meaning a group of partners who together own more than 50 percent of the partnership. You may be able to meet this requirement by having a majority-in-interest vote for a written resolution to dissolve the partnership and wind up its business activities.
Winding Up the Business
One you’ve made the decision to dissolve, we may advise the drafting a written dissolution agreement, which will specify how you’ll wind up any ongoing business and how you’ll distribute any assets or liabilities. If you have difficulty coming to an agreement, you might want to make use of an outside mediator, as we may advise.
If you can’t come to an agreement, sometimes your best option is to pursue relief in a legal action, possibly including a lawsuit or a request for an injunction or the appointment of a receiver (a person appointed by a court to sell or dissolve or otherwise dispose of the business).
When winding up the business there are many questions to consider
Does the partnership have any current leases, contracts, or loans? Have any partners personally guaranteed the debts or obligations of the partnership? Are there any third-party liens incumbering partnership assets?
Are there unresolved lawsuits or unsatisfied judgments against the partnership? Have any partners tried to convey or transfer their partnership interest to a third partner? Has the partnership filed its state and federal tax returns in a timely manner?
Does it currently owe payments for any taxes? If one partner is deceased, is his or her partnership interest now under the control of an executor? You’ll need to address all of these–these matters don’t go away when the partnership does.
In fact, if the partnership terminates or dissolves before these matters obligations or liabilities are addressed, these liabilities may attach to the individual partners, jointly and severally. If the partnership has outstanding debts, it must pay or settle them with partnership assets, before distributing any remaining assets among the partners. It might be necessary to liquidate some of them.
What is the business worth? Texas law states that, after creditors are paid, partners should receive back their capital contributions. Then, any remaining assets are distributed among the partners.
Without a partnership agreement, each partner has an equal share in the assets and liabilities, after creditors and capital contributions are paid back. But your agreement might specify otherwise. It might be relevant to ask whether each of the partners has fulfilled the duties agreed upon.
What happens to the company’s customers, proprietary business information, inventions, web domain, inventory, trademarks, copyrights, patents, and goodwill? These items may not be saleable, but may retain considerable present and future value that the partners should consider.
Once the partnership dissolves, will one or more of the partners continue the business? If so, they should consider other options for structuring their business, such as incorporating it as an LLC, corporation, or new partnership.
Notifying Third Parties of the Dissolution
Once the business has been dissolved, you should notify all customers, partners, and suppliers. This isn’t a legal requirement, but not doing it could cause you problems down the road. For example, if one of the former members of the partnership signs a contract with someone who hasn’t been notified of the dissolution, all members of the partnership could be jointly and severally liable for the duties and obligations of the partnership under the contract.
Unlike many states, Texas has no requirement that you notify it when a partnership is dissolved. You may not be liable for the franchise tax so long as all partners are natural persons and the partnership’s income falls below various thresholds.
The partnership also needs to file its final federal tax return by the 15th day of the fourth month following dissolution. Both the franchise tax and the final tax return are matters to discuss with your lawyer or CPA. If you do business out of state, you may need to file separate forms to terminate your right to do business in those states.
These forms go by many names, including “termination of registration,” “certification of termination of existence,” “application of withdrawal,” and “certificate of surrender of right to transact business.” If you don’t file these forms, the individual partners could be liable for those states’ minimum business taxes.