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Do You Have to Dissolve a Business Partnership if a Partner Leaves?

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If you have entered into a business partnership and the business is running successfully, you may not have given dissolution a second thought. However, it is still important to consider company dissolution, as you may have to dissolve a partnership when a partner leaves the business. A comprehensive partnership agreement can help in situations like these. But in which circumstances do you have to dissolve a business partnership and is there a way to avoid this? Read on to find out the essential information.

Which Factors Can Lead to a Termination of Partnership?

Several factors can lead to the termination of a business partnership, even if the business relationship begins amicably. Some of the main factors that may lead to a partnership termination include the following:

  • Long-term or serious illness
  • Career changes
  • Retirement
  • The death of a partner

Of course, other factors may lead to a less cordial partnership termination, including management style discrepancies, a lack of honesty, or financial difficulties.

In many situations like these, a partner may leave the business and disrupt your company’s success.

Does Changing Partners Dissolve a Company?

Legally, if you change partners in various states, this automatically dissolves your partnership. The only factor that can override your state’s law related to automatic company dissolution is having a partnership agreement.

With a partnership agreement established, your partnership will dissolve, but you will replace it with new members, and your business can still operate.

What is a Partnership Agreement?

Partnership agreements are legal documents that establish the responsibilities of all the partners in the business. These documents also detail the percentage of the company each partner owns and the profits and losses that the partners are responsible for.

With a partnership agreement, you can include information on how you will manage the company and plan for any situations that may disrupt the business. For example, you can establish specific expectations for when a partner leaves the business.

Why Are Partnership Agreements Important?

A partnership agreement is crucial as you can tailor it to your business.

Without a partnership agreement, the state’s partnership laws govern the operation of your partnership – if you want to avoid defaulting to the state’s partnership laws, a partnership agreement is critical.

What Should You Include in a Partnership Agreement?

There are a few critical parts to include in a partnership agreement. Not only is the name and contact information of your business and owners important, but the following clauses are also key when drafting a partnership agreement.

1.    Information about making decisions

You should establish whether all your business-related decisions must be unanimous and which choices you will put to the vote or majority rule. You must also determine whether the percentage of ownership will affect the weight of each partner’s vote when making decisions.

2.    Details on your business goals

In your partnership agreement, you must describe the goals you are working towards, which may include revenue-related targets or the number of employees you want to hire. You may also mention any marketing targets for your business.

3.    A section on adding or removing business partners

Including a section on adding or removing business partners and how you will address and handle situations in which a partner leaves the company is critical. You should establish regulations or protocols for removing a partner to avoid deferring to state laws on business dissolution.

4.    A clause related to taxation

Who will take responsibility for business taxation management? You should address this issue in a clause related to business taxation in your partnership agreement.

What is a Dissolution Statement?

A dissolution statement is a document that declares the termination of the partnership and states that the partnership no longer exists. You must file a dissolution statement with the secretary of state if an event causes or leads to the termination of a partnership.

In a dissolution statement, you should declare the partnership’s name and state that you are winding up the business of the partnership.

A dissolution statement limits the partners’ accountability for wrongful dissociation or act of omission from the dissolution.

Dissolving a Business: Vital Factors Not to Forget

Even if your partnership is going well, it is still important to remember that several factors can cause your partner to leave the business, so it’s essential to be prepared. A partnership agreement can help you prepare for when a partner chooses or is forced to leave the partnership. Establish one sooner rather than later to handle the situation and avoid letting state law dictate what happens to your business. Don’t forget to include the essential information listed in this article in your partnership agreement.

Kossi Adzo is the editor and author of Startup.info. He is software engineer. Innovation, Businesses and companies are his passion. He filled several patents in IT & Communication technologies. He manages the technical operations at Startup.info.

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