There can be many reasons that lead to the dissolution of a partnership. Making sure your interests are protected and secured requires a skilled business attorney.
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 occurs 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.
The Uniform Partnership Act (UPA) is an act that governs the operation of partnerships, including partnership dissolutions. The UPA was established in 1914 and many later revisions have occurred in the 1990’s (referred to as the RUPA). Many state laws governing partnership dissolution are based on the UPA.
Section 31 of the UPA gives several reasons for permitting a partnership dissolution. These include additional reasons not stated in Arizona law, such as the bankruptcy of any partner or of the partnership itself, the death of any partner, or any event that makes it unlawful for the business of the partnership to be carried on.
In addition, Section 32 of the UPA, provides courts great latitude and power to decide the dissolution of a partnership.
In Arizona a partnership may be dissolved either judicially or non-judicially. A.R.S. § 29-344 states four separate ways a limited partnership may be dissolved non-judicially (i.e., without court intervention). First, if there is a time specified in the certificate of limited partnership, then the partnership may be dissolved at that time as a matter of course. Second, if certain events occur as stated in the partnership agreement, then the partnership may be dissolved per that document. Third, if all partners give written consent, then the partnership may be dissolved. Fourth, if a general partner withdraws and there is no remaining general partner (with an exception set forth in the law if limited partners agree to continue the partnership). For non-judicial dissolutions it is vital to look at the partnership agreement (if there is one) for actions that can lead to a dissolution or to see if all partners can simply agree that the partnership may be dissolved.
If needed, the Superior Court of Arizona may get involved. If the court finds that it is “not reasonably practicable to carry on the business in conformity with the partnership agreement” then the court may order the dissolution of the partnership (see A.R.S. § 29-345). This is mainly needed when the non-judicial options don’t provide a satisfactory resolution. One classic example is where the partners just don’t see eye-to-eye with each other and the business becomes deadlocked because neither one of them alone can act on behalf of the company.
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In determining whether to dissolve a partnership it is best to review the partnership agreement first to see what provisions may be helpful in the process. If there is not a partnership agreement there are other options, which may include judicial involvement if necessary. In order to ensure that a partnership is successfully dissolved by complying with the law it is best to speak with a competent Arizona business law attorney. An attorney will be able to provide advice on what is best for your particular situation. Call today!
Collins v. Lewis, 283 S.W.2d 258, 261 (Tex. Civ. App. 1955).
