Dissolving a business partnership agreement is not just a matter of shaking hands and walking away, it often involves a series of legal steps that must be carefully followed. If you're in the UK and want to know how to get out of your partnership agreement without complications, then you're on the right page.
In this article, we'll deep dive into:
How you and your business partner can remain in compliance with the UK partnership laws during the process
The challenges you would likely face during the process and how to navigate them
The alternatives to partnership dissolutions
How to navigate the aftermath of the dissolution (i.e who gets what in terms of assets and liabilities)
Types of Partnerships and Dissolution Options
There are two main types of partnerships, and understanding the difference between them will help you decide which type best suits your business structure, tax and obligations and liability concerns.
General Partnerships
This type of partnership is very popular in the UK for the following reasons:
It is very easy and cheap to set up.
It typically comprises two or more partners that will assume the responsibility of managing and controlling the company's entire operation.
All the partners have equal responsibility and rights.
Since each party is responsible for their debts, this type of partnership can be dissolved easily if one dies or goes bankrupt.
The taxes levelled on the partnership income will be paid by the partners, not the partnership.
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs)
Limited Partnerships (LPs) consist of one or more general partners who manage the business and have unlimited liability, alongside one or more limited partners who have limited liability and do not participate in day-to-day operations.
In this type of partnership:
A written contract is often required to showcase the code of conduct, partners' rights, and other important details.
Dissolving this type of partnership is difficult, as partners must file a “Statement of Dissolution” or “Statement of Cancellation.” form.
This type of partnership is very expensive to set up, and the partners will also pay taxes on the partnership income according to the amount specified in the agreement.
Limited Liability Partnerships (LLPs), on the other hand, provide all general partners with limited liability protection while allowing for flexible management structures. This means that they will not be held responsible for any loss if one partner incurs a debt or liability on behalf of the business.
The partnership dissolution process for LPs and LLPs differs, especially concerning partners' liability and the legal requirements for dissolution.
Dissolution by Agreement
A partnership can be dissolved through mutual agreement. This is frequently the best course of action, especially when all partners agree to dissolve the partnership amicably. Many partnership agreements include specific dissolution clauses, which can help streamline the process. These agreements usually include conditions such as notice periods, exit strategies, and distribution of partnership assets and debts.
Dissolution Without Agreement
If there is no partnership agreement in place and the parties want to dissolve their partnership, the rules of the Partnership Act 1890 dissolution will come into effect. This act posits that a partnership will automatically be dissolved if one of the parties communicates their intention to leave. In fact, the party doesn't need to give a reason for leaving. In addition to a partner’s personal reasons, partnerships can also be automatically dissolved as a result of various life events, including:
One of the partners passes away.
The partner has reached the end of their previously agreed contract term/length.
One of the partners goes bankrupt.
Court intervention.
One of the partners is involved in illegal activities.
Steps to Dissolve a Business Partnership Agreement
Dissolving a business partnership in the UK is not easy. Still, if you follow all the steps, you can complete the process seamlessly while complying with legal requirements and avoiding complications.
1. Review the Partnership Agreement
The first step in dissolving a partnership is to carefully review the partnership agreement. Ideally, the agreement should contain all dissolution clauses or terms and the procedure for dissolving the partnership. By following the agreed-upon terms and clauses outlined in the agreement, you can ensure that the dissolution is done swiftly without resulting in disputes or a complete fallout.
However, if no agreement is in place, the best way to dissolve the partnership would be to sit down with the other partners and decide how to dissolve it. A third party or court intervention could also be used to dissolve it.
2. Provide Notice of Dissolution
After you decide to exit a partnership, the next step would be to make it official to other partners. However, before sending your written notice to your business partners, it is important that you have given much thought to what you are willing to accept and what you are prepared to give up to exit the business. For example, you might have to give up a certain percentage of your revenue before exiting the partnership.
But what if I want someone to exit the partnership? What should I do? The best approach is to convince them to sell their shares. You may also need to offer a portion of your revenue to make the deal more appealing.
3. Settle Debts and Liabilities
After the decision has been made and the other investors have been duly informed, the next stage would be to resolve finances. This includes paying off all debt and closing all joint bank and credit accounts.
It is also important to inform all your creditors, suppliers, clients, and HM Revenue and Customs (HMRC) of the dissolution to avoid future complications. You should also terminate the partnership's business permits, licenses, and every other registration that involves the business.
4. Distribute Remaining Assets
After settling debts, the next step is to distribute any remaining assets. This distribution should adhere to the guidelines outlined in the partnership agreement. However, if no agreement is in place, the Partnership Act 1890 requires that assets be distributed equally among partners.
5. File for Dissolution with the Registrar (for LLPs)
For Limited Liability Partnerships (LLPs), partners must file a DS01 form with Companies House to officially strike off a company from the register. Filling out this form legally ends a partnership. The DS01 form can be filled out online or submitted by post. Online applications cost £33, while paper applications cost £44 and can only be paid using a check or postal order.
Legal Requirements and Obligations
In the UK, the Partnership Act 1890 governs the formation, operation, and dissolution of partnerships. It outlines partners' legal rights and responsibilities and provides a framework for resolving disputes. This act also gives guidelines on how a partnership will be dissolved without a written agreement.
Partnerships will be allowed to get dissolved if one of the partners signifies their decision to exit.
Upon dissolution, the business must stop trading, and the partners will sell off assets, pay debts, and ultimately close the business.
Aside from your partners, you are legally obligated to inform your clients and suppliers of the partnership's dissolution. Informing them will not only prevent any misunderstandings but will also ensure that:
No contracts or obligations are formed by the clients under the dissolved partnership.
The clients adjust future dealings accordingly, and
Your reputation and that of your business are well protected.
One of the worst mistakes you can make is to dissolve a partnership without sorting out the financial side of it, such as filing tax returns, closing all joint bank and credit accounts relating to the business, and revoking all business licenses. Neglecting these steps can lead to ongoing liabilities, legal issues, and damage to your financial standing even after the partnership has ended.
Potential Challenges in Dissolving a Partnership
Dissolving a partnership can be complex and emotionally charged, often accompanied by various challenges. Understanding potential hurdles in advance can empower partners to make informed decisions as they move forward.
Disputes Among Partners
Breaking up in business can be as difficult as in romantic relationships. Emotions can run high, and disagreements about assets, finances, and future responsibilities are common. As a business partner, you must handle this phase with utmost professionalism so that the dispute does not escalate to a point where both the personal and business relationships between the partners are severed.
You can employ mediation and arbitration methods to resolve partnership disputes amidst the dissolution. While the latter involves a neutral third party making a binding decision, mediation facilitates a dialogue between partners to reach a mutually agreeable solution.
Outstanding Liabilities
Partners in a general partnership are more likely to experience this. As we pointed out earlier, a general partnership entails that all the partners are individually responsible for all the business debts, which can pose a risk during dissolution. To prevent disputes and protect the partners' finances, it is critical to identify and address all outstanding liabilities. This includes resolving debts, closing joint accounts, and ensuring that all financial obligations are properly managed before the partnership dissolves.
Future Business Restrictions
If the partnership agreement contains a restrictive covenant or non-compete clause, it is essential that exiting partners know and understand this clause, what it covers and how it can affect their future business endeavours.
Alternatives to Dissolution
Due to the expensive and time-consuming nature of dissolution, it sometimes makes more sense to find an alternative to dissolution, and one of them is partnership restructuring. This method can involve:
Bringing in new partners
Changing the roles and responsibilities of the existing partner to freshen things up
Changing the structure of the company to a limited liability
Another alternative to outright dissolution of the partnership is to convince a partner who wants to exit the agreement to sell their share to another partner or a third party. This method will enable the business to continue under new ownership while providing a clear exit strategy for the selling partner. It’s a win-win situation for everyone involved!
Best Practices for a Smooth Dissolution
Maintain Open Communication: To minimise misunderstanding and conflict during the dissolution process, it is important that you keep communication open throughout. Your partners must be able to communicate their thoughts, ideas, and concerns. This approach will ensure that all the parties are on the same page and issues will get to be addressed promptly and effectively.
Seek Professional Advice: You should also prioritise hiring a solicitor knowledgeable about corporate law in the UK. Their expertise can help you navigate the complexities of the dissolution process, ensuring that all legal requirements are met and protecting your interests along the way.
Document Everything: Throughout the dissolution process, partners should keep a record of all decisions and communications made during that time. That also includes agreements the partners have concerning how the assets and liabilities will be distributed. This documentation might come in handy in the near future if you need to resolve disputes or clarify terms.
Legal and Regulatory Considerations
Whether a partner is exiting the agreement alone or the whole partnership is getting dissolved, it is still important that all their actions and processes comply with the UK partnership law. Here are some of the legal requirements:
All outstanding debts must be resolved before the dissolution is finalised.
If an entity wants to exit the partnership, they must inform the other parties about their decision.
All legal documents, including the DS01 form, must be completed and submitted to Companies House.
Clients, suppliers, and other stakeholders must be notified about the dissolution.
File tax returns with the HMRC.
If the partnership employs employees, partners are mandated by the UK employment law to pay them all their outstanding wages or benefits during the dissolution process. Failing to do so can result in legal action, including fines or penalties, and could even damage the partners' reputation.
If you are contemplating ending a partnership in the UK, you should contact a legal professional who can clarify your rights and obligations and assist you in complying throughout the dissolution.
FAQs
How do I dissolve a business partnership in the UK?
You will start by reviewing the partnership agreement and then provide written notice of dissolution. After your partners are aware of this, the next step is to find a way to settle all debts and liabilities, distribute remaining assets, and file the necessary documents with Companies House.
What happens to the business debts when a partnership is dissolved?
In a general partnership, partners are personally liable for business debts, meaning creditors can pursue individual partners for outstanding amounts.
Do I need a solicitor to dissolve a business partnership?
Yes and no. While no law mandates it, it is still highly advisable to seek a solicitor's service when trying to get out of a partnership deal. The main reason lies in their experience, expertise and familiarity with relevant UK law regarding partnerships.
Can a partner be forced to leave a partnership?
If a partner does not wish to dissolve the partnership but another partner does, the remaining partners may consider legal action, mediation, or simply buying their shares out. However, partners typically cannot be forced out UNLESS
The partnership agreement says so
They engage in illegal activity concerning business
Majority shareholders vote to remove such partner
What are my rights if I disagree with the dissolution?
If you disagree with the dissolution, you can raise your concerns and seek mediation or arbitration. It is also important that you review the partnership agreement to understand your options.
Conclusion
Ending a partnership agreement can be a complex process, but understanding the steps involved can ensure the process goes smoothly. At LawnHive, our corporate solicitors can provide you with personalised advice and support throughout the dissolution process, ensuring it is handled efficiently and in full compliance with UK partnership law. Contact us today, and let us protect your interests!