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Saturday, June 2, 2018

Dissolution of a Partnership: Drafting the Agreement

It is not uncommon for one or more of the partners in a partnership to decide that they no longer want to be involved in the business and, thus, seek the consent of the others to withdraw.  Hopefully, the partners entered into a well drafted partnership agreement at the outset, setting for the procedure to be followed if a partner wishes to withdraw and detailing how the assets of the partnership will be dealt with, what price will be paid, if any, for the partnership interest.

Some of the issues which need to be addressed in an agreement wherein a partner leaves the partnership include:  what price will be paid for that partner's interest, if any, which will likely include the value of inventory, equipment and receivables; how will receivables and payables be treated; how the purchase price will be paid; and what happens with liabilities.

These sound like simple issues, but they can become quite complicated.  Perhaps one of the most contentious issues has to do with liabilities.  Of course, the partner who is withdrawing from the partnership wants no part of liabilities.  Fairly, he or she should not be responsible for liabilities which arise after he or she leaves.  What happens with liabilities which arise while he or she was a partner but do not come to fruition until later is always a divisive issue.

Access to partnership books and records, tax returns, records of receivables, etc. are all important to the withdrawing partner.  On the other hand, the remaining partners do not want to be on the hook for obligations that arose while the partnership was in tact.

There are no perfect answers here.  To be sure, however, the withdrawing partner and the partnership need to have separate counsel advising them on these matters.  Maintaining reasonableness and civility is key to resolving these issues effectively and efficiently.

 

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