What Does Dissolving a Partnership Mean?
Similar to a spouse who may decide to file for divorce because of differences of opinion or actions by the other spouse, partners in a partnership may seek to dissolve, or terminate, their partnership. Indeed, these scenarios are often referred to as “business divorces” in the legal world. The law allows for the dissolution of a partnership under certain conditions. Perhaps Chief Justice Hamblen stated it best in 1955 when he said, “there always exists the power, as opposed to the right, of dissolution.”1 Partners always have the power, but may not necessarily have the right to dissolve their partnership if they are bound by a contract. This means that partners may dissolve a partnership, but may still be held liable for the breach.
First, it is important to know that dissolving a partnership is not the same thing as going out of business. Under the Uniform Partnership Act § 29 a dissolution is simply “the change in relationship of the partners caused by any partner ceasing to be associated in the carrying on the firm’s business.” The process that is commonly called the “winding up” of the partnership occurs after dissolution.
Before even entering into partnership it is best to prepare for what might occur in the event of a dissolution. One thing that should be done when starting a partnership is to draft a good partnership agreement that clearly spells out what is going to happen in the event of a dissolution. When drafting a partnership agreement, it is best to have a buy-sell agreement in the partnership contract. A buy-sell agreement is helpful because it provides a good method whereby one partner can buy the other partner out of the business if they want to split up. A well drafted partnership agreement may alleviate problems down the road.