How To Dissolve a Partnership

Dissolving a business partnership can be a complex and emotional undertaking. To ensure a smooth and successful transition, it’s essential to follow the proper steps, taking into account all relevant factors, from reviewing your partnership agreement to notifying stakeholders and finalising the dissolution.

This step-by-step guide will outline the key steps involved in dissolving a business partnership, providing tips and insights to help you navigate the process.

The Impact of Partnership Agreements on Business Dissolution

Whether you have a partnership agreement in place will have a significant impact on how you dissolve your business partnership.

If you have a partnership agreement:

• The existing agreement should outline the terms and conditions of dissolution, including the following:
  • The process for notifying the other partners of your intent to dissolve the partnership
  • The procedure for winding up the partnership’s affairs
  • The method for distributing the partnership’s assets and liabilities

If you do not have a partnership agreement:

Without an agreement, the process will be governed by the Partnership Act 1890.

• This law states that a partnership can be dissolved by the following means:
  • The death or bankruptcy of a partner
  • The expiry of a fixed-term partnership
  • The mutual agreement of all partners
  • A court order
• If you and your partners are unable to agree on how to dissolve the partnership, you may need to apply to the court for a dissolution order.

Types of Partnership Dissolution

There are two main types of partnership dissolution in the UK:

• General dissolution: This is the most common type of dissolution and occurs when the partnership is wound up and ceases to exist. This can be done for a number of reasons, such as the bankruptcy of a partner, the expiry of the partnership agreement, or a mutual decision to end the partnership.
• Technical dissolution: This type of dissolution allows one partner to withdraw from the partnership while allowing the business to continue. The withdrawing partner will receive their share of the business in cash, and the remaining partners will take on their share of the business’s assets and liabilities.

Both general and technical dissolutions can be complex, especially if the partners are in dispute. It is important to seek professional advice from a lawyer or accountant to ensure that the dissolution process is handled correctly.

What is the Process to Dissolve a Partnership? 

The steps for dissolving are slightly different for either type of partnership, as follows:

If You’re Choosing a General Dissolution

1. Review the partnership agreement.
2. Notify stakeholders.
3. Wind up the business. This may involve selling assets, liquidating inventory, and paying creditors.
4. Distribute the remaining assets to the partners.
5. Close all business accounts and cancel any licenses or permits.
6. Notify relevant authorities and government agencies of the dissolution.
7. Communicate the outcome to stakeholders.

If You’re Choosing a Technical Dissolution

1. Review the partnership agreement.
2. Notify stakeholders.
3. The withdrawing partner will negotiate a buyout with the remaining partners.
4. Once the buyout is agreed upon, the withdrawing partner will receive their share of the business in cash.
5. The remaining partners will take on the withdrawing partner’s share of the business’s assets and liabilities.
6. The partnership will continue to exist with the remaining partners.
7. Notify relevant authorities and government agencies of the technical dissolution.
8. Communicate the outcome to stakeholders.

How to Dissolve a Limited Liability Business Partnership (LLP)

Dissolving an LLP can be a complex process, but it is important to understand the steps involved in order to ensure a smooth and orderly transition.

1. Review the LLP agreement. The LLP agreement will outline the process for dissolving the partnership, including the requirements for notice, asset distribution, and creditor payment.

2. Notify stakeholders. This includes employees, customers, vendors, and any other parties with an interest in the LLP.

3. Wind up the business. This may involve selling assets, liquidating inventory, and paying creditors.

4. Distribute the remaining assets to the partners. This will be done in accordance with the LLP agreement.

5. Close all business accounts and cancel any licenses or permits.

6. Notify Companies House of the dissolution. This can be done online or by post.

7. Notify HMRC of the dissolution. This is important to ensure that the LLP’s tax affairs are properly concluded.

If the LLP is in debt, it may be necessary to apply to the court for a dissolution order. This can be done if the partners are unable to agree on how to wind up the business or if the LLP is unable to pay its debts.

Dissolving a Business Partnership in a tax Efficient Manner

A member’s voluntary liquidation (MVL) is the most tax-efficient way to dissolve a general business partnership (meaning that one partner is not being replaced by a new one). This is often the case when one or both partners are retiring.

An MVL is a formal process for winding up a solvent business partnership. It allows the partners to distribute the remaining assets to themselves without having to pay income tax. Instead, any capital gains will be taxed at a lower rate.

To initiate an MVL, the partners must sign a declaration of solvency. This confirms that the partnership can pay all of its debts within 12 months of the liquidation. Once the declaration is signed, an insolvency practitioner can be appointed to oversee the winding-up process.

The insolvency practitioner will sell off the partnership’s assets and use the proceeds to pay off the debts. Any remaining assets will then be distributed to the partners according to their ownership shares.

MVLs offer significant tax advantages over other methods of dissolving a business partnership. This is because capital gains tax is generally lower than income tax. This means that the partners will pay less tax on the money they receive from the liquidation.

Can the Court Order the Dissolution of a Partnership?

Yes, the court can order the dissolution of a partnership in the following circumstances:

• Incapacity or inability to perform duties: If a partner becomes incapable of performing their duties, or if they are otherwise unable to contribute to the partnership, the court may order the partnership to be dissolved.
• Prejudicial conduct: If one partner’s conduct is considered to be prejudicial to the continuation of the business, the court may order the partnership to be dissolved. This could include conduct such as fraud, theft, or other serious breaches of the partnership agreement.
• Breach of partnership agreement: If a partner breaches the terms of the partnership agreement, the other partners may apply to the court to have the partnership dissolved.
• Loss-making business: If the partnership is only able to continue at a loss, the court may order it to be dissolved.
• Just and equitable: In exceptional circumstances, the court may order the dissolution of a partnership even if none of the other conditions are met. This could be the case if the partnership has broken down irretrievably, or if it is no longer in the interests of the partners or the business to continue.

It is important to note that the court will only order the dissolution of a partnership as a last resort. If there is any possibility of the partnership continuing in a viable manner, the court will usually try to facilitate this.