9th June 2020
Contents
9th June 2020
Business partnerships can end for a number of reasons. Partners might be unable to agree about a way forward for the business. The business could be failing to turn a profit. Or the partners might simply lose interest in the project.
Whatever the situation, there are certain procedures that need to be followed. Partnerships involve some important legal relationships, and if the partners do not take the necessary steps, then there can be significant consequences.
In particular, under Australian partnership laws, all partners are jointly responsible for the debts of the partnership. Furthermore, one partner can become liable for debts that another partner has incurred on behalf of the partnership. As a consequence, if one or more partners try to leave a partnership or to dissolve a partnership, but do not follow the appropriate procedures, then they may continue to be responsible for future liabilities incurred by other partners.
There are many reasons that a partnership might end, including:
Whatever the reason that the partnership may end, there are certain procedures to follow. These may be set out in the Partnership Agreement (if there is one) or in relevant partnership laws.
Ideally, the partners will have been thinking ahead when they first created the partnership, and will have used a written Partnership Agreement.
The value of a well written Partnership Agreement becomes particularly apparent at times like this because it will set out some clear rules and procedures regarding the ending of the partnership. In particular, it should include some guidelines regarding the withdrawal or resignation of partners (whether voluntary or involuntary), or how the partnership may be dissolved. It should clarify what is to happen if a partner dies or becomes bankrupt. It should also include some guidelines regarding how the remaining assets of the partnership will be divided.
If there is a Partnership Agreement, then the partners should consult that as a first step, and should follow any relevant procedures set out within it.
If there is no Partnership Agreement, then relevant partnership legislation (in the state or territory where the partnership was created or where it carried on most of its business) will apply. Each state and territory of Australia has a Partnership Act, and these may be accessed by the links below:
Even if there is a Partnership Agreement, in some cases it may not adequately deal with the circumstances at hand. For example, while our Partnership Agreement deals with dissolution, another type of Partnership Agreement may not address it. If this is the case, then the partners may look to the relevant Partnership Act in their state or territory which will set out how the partners should go about ending the partnership.
In addition, many partnerships that do not have a Partnership Agreement, find it helpful to use a Deed of Partnership Dissolution when dissolving the partnership. This allows the partners to clearly set out the details of the dissolution, and to reach an agreement about how the various assets and liabilities will be distributed.
As mentioned above, one common way for partnerships to end, is for the term of the partnership (as set out in the Partnership Agreement) to come to an end. In other words, some partnerships are created for a set period of time. When that time comes to an end, the partnership may be dissolved.
Alternatively, is is also common for partnerships to be created for an indefinite term. In other words, the Partnership Agreement does not specify when the term of the partnership will end, and it continues indefinitely, until the partners decide to terminate it.
Either way, there are still a few steps which the partners will need to take. These will be discussed further below.
If there is a written Partnership Agreement then this may set out some guidelines regarding what may happen if a partner wishes to retire from the partnership. If there is no written Partnership Agreement or if the Partnership Agreement does not say anything about this matter, then the retiring partner may look at the Partnership Act in their state or territory for guidance.
In most cases (whether there is a Partnership Agreement, or whether the local Partnership Act applies), the retiring partner will need to provide written notice of their resignation to the remaining partners. We have a Notice of Retirement from Partnership which may be used for this purpose.
Once a partner retires, the partnership will either be dissolved, or technically dissolved.
If the composition of the partnership changes (ie if a partner retires or dies, or if a new partner joins the partnership), then the partnership is dissolved and a new partnership is formed.
However, if the remaining partners (and any new partners) want to keep operating the partnership, without the retired partner, then they may be able to treat it as a "technical dissolution". The partnership may then continue as a "reconstituted partnership".
For example, this can occur when one partner wants to leave the partnership, but the remaining partners (as well as any new partners) do not actually want to close down the partnership business. Instead, they may want to keep running the partnership's business with no interruption. By going through a "technical dissolution" and creating a "reconstituted partnership", they take over the assets and liabilities of the partnership, and can keep using the partnership's same Australian Business Number (ABN) and Tax File Number (TFN).
Although the partnership has technically been dissolved and reconstituted, the partnership's business has been able to keep running as normal.
The Australian Taxation Office provides further information about technical dissolution and reconstitution of partnerships.
Alternatively, if the remaining partner(s) are not planning to continue running the partnership's business, then the partnership may be dissolved.
In this case, the partnership may be dissolved when one partner notifies the other partners that they wish to retire from the partnership (and those remaining partners do not intend to continue with the partnership business). Again, our Notice of Retirement from Partnership may be used in these circumstances. This document may be adapted for use in the case of one partner retiring (ie a technical dissolution), or in the case of a dissolution (when the remaining partners do not intend to keep running the partnership business).
If the partnership is being dissolved, then the partners will need to follow any procedures set out in the Partnership Agreement or in the relevant Partnership Act.
A Deed of Partnership Dissolution can be used to set out the details of the dissolution, including such matters as what will happen with the various assets and liabilities of the partnership. This can be particularly useful if the partnership has been operating without a Partnership Agreement, or if the existing Partnership Agreement does not provide details about ending the partnership.
Obviously, in the case of a dissolution (when the remaining partners are not going to keep running the partnership business), then the partners will need to notify third parties such as customers, suppliers, and banks, that the partnership is being dissolved.
However, even in the case of a technical dissolution (when the remaining partners are going to keep running the partnership business) it is generally in the best interests of both the retiring partner and the remaining partners, that relevant third parties are notified of the partner's retirement.
This is because the Partnership Act in most states and territories provides that a third party which has had prior dealings with the partnership, and which has not been informed of the retiring partner's retirement, may be entitled to still treat that retiring partner as a partner of the firm. This means that the retiring partner may still be able to do things which create liabilities for the partnership - such as borrowing money in the name of the partnership. In addition, that third party may still hold the retiring partner responsible for liabilities of the partnership. Therefore, regardless of whether the legislation specifically requires third parties to be notified, it is good practice to notify them anyway, to prevent them from continuing to treat that retiring partner as a partner of the partnership. Again, our Notice of Retirement from Partnership may be used for this purpose.
Upon the dissolution of the partnership, the assets and liabilities of the partnership will need to be accounted for.
Each partner is generally responsible for the liabilities of the partnership from their time as partner. However, the assets of the partnership may be applied towards these liabilities of the partnership.
If the partnership had employees then all employee obligations will need to be addressed.
There are likely to be tax issues to consider as well, so the partners should ensure that they obtain accounting advice.
Further information about closing a business is available from the Australian Government.
Depending on the terms of the Partnership Agreement or the state or territory in which the partnership operates, there may be additional requirements. For example, in some states and territories it is necessary to publish a notice in the Government Gazette and in the newspaper(s) in the region(s) where the partnership operates. Further information may be obtained from the business authority in the relevant state or territory:
There are many reasons that a partnership may end. If there is a written Partnership Agreement then the partners should refer to this first. If there is no written agreement, then the Partnership Act in the relevant state or territory is likely to apply.
Once a partner retires, if the remaining partners want to keep operating the partnership business, then it might be possible to treat the partnership as "technically dissolved". The partnership will then be "reconstituted", and the partnership business will be able to continue uninterrupted.
Alternatively, if the remaining partners do not want to keep operating the partnership business, then the partnership may be dissolved. The assets and liabilities may be dealt with and the partnership business may be closed.
A Notice of Retirement from Partnership may be used by a retiring partner, in order to provide formal written notice to the partnership that they are retiring. It may also be provided to third parties, to notify them of what is happening. It may be used both in the case of a technical dissolution, when the partnership business is going to continue (just, without the retiring partner) and in the case that the partnership is dissolved altogether and the partnership business closed.
There may be significant tax consequences, so the partners should obtain advice from an accountant. And as always, if they have any concerns about their legal position, they should seek legal advice.