As with a limited company, it isn’t possible to simply shut the doors of a business partnership without following the correct legal protocol.
The formal method of closing a business partnership is to dissolve it. In this article we’ll explain how to dissolve a business partnership, and the ramifications different types of partnership will have on your legal situation.
If you have a partnership agreement set up, that will of course set out the procedure should one partner choose to exit. But if that isn’t in place, the actions will be laid out by the Partnership Act 1890 (the Act).
What Type of Business Partnership are you in?
Many business partnerships begin without fully considering what might happen if the venture fails.
The type of partnership, however, can have serious implications where debt is involved. Ordinary partnerships hold both parties joint and severally liable for any debt meaning, if one of the partners becomes bankrupt or absconds, the remaining partner may find themselves personally liable for the business debt.
Ordinary partnerships bear similarities to acting as a sole trader in that the business does not have the status of a separate legal entity. For this reason, LLP’s offer a ‘limited liability’ status to the partners which makes it a safer prospect.
How to Dissolve a Limited Liability Business Partnership (LLP)
An LLP, or limited liability partnership, means that neither business partner can be held liable for the others misconduct, or debt (assuming no personal guarantee has been signed).
In this situation, the LLP is considered a separate legal entity from the individuals running it and as such cannot dissolve automatically in the case of death, divorce, or the disagreement.
There is a formal process to go through which involves applying to the registrar of companies for a formal voluntary strike off. Read More About Striking Off.
What Conditions Must be met for an LLP to Apply for Strike off?
- It must not have traded within three months
- All debts must be cleared
- Company assets must be liquidated, and bank accounts should be closed,
- Strike off is not possible where formal insolvency proceedings are underway
Dissolving a Business Partnership in a tax Efficient Manner
In the case of a general dissolution (meaning the one partner is not being replaced by a new one), often provoked by one or both of the partners retiring, the most tax efficient way is likely to be a members voluntary liquidation.
An MVL is the best way to close either a limited company or a business partnership that is solvent and has assets.
Once the partners signed a declaration of solvency confirming they can settle their debts within a 12 month period, an insolvency practitioner can formally the partnership into a members voluntary liquidation.
MVL’s offer significant tax advantages in that any capital released from the business will attract capital gains rather than income tax. This means no matter how much money is involved individual partners will pay a far lower rate of tax, in most cases.
Entrepreneurs Relief for Business Partners
Assuming the business has been owned for at least a year before the MVL procedure, entrepreneurs relief offers qualifying assets a reduced rate of 10% tax instead of either 18 or 28%.
Since the legislation around entrepreneurs relief is fairly complex, we recommend making contact with us to discuss your particular situation and will see we can help.
Can the Court Order the Dissolution of a Partnership?
The court can order the dissolution in the following circumstances:
- where a partner becomes incapable of performing their duties, or incapacitatd
- where one partner’s conduct may be considered to ‘prejudice’ the continuation of the business
- where a partner breaches the terms of the partnership agreement
- where the business partnership can only be continued at a loss
- it is deemed just and equitable to dissolve the partnership