Dissolving a business partnership can be a complex and emotional process. Whether you’re parting ways amicably or due to irreconcilable differences, it’s essential to follow the proper steps.

Many factors must be considered, from reviewing your partnership agreement to notifying stakeholders and finalizing the dissolution.

In this step-by-step guide, we’ll outline the key steps involved in dissolving a business partnership and provide tips to help you easily navigate the process.

Understanding Partnership Dissolution

There are two types of partnership dissolution: voluntary and involuntary.

Voluntary dissolution occurs when partners agree to dissolve the partnership, usually because they’ve reached the end of their partnership agreement or because of a mutual decision to end the partnership.

Involuntary dissolution occurs when one partner seeks to dissolve the partnership without the agreement of the other partner, usually due to a breach of the partnership agreement or a breakdown in the relationship between partners.

Regardless of the type, it’s important to clearly understand the terms of your partnership agreement and any relevant laws and regulations that apply to your business.

Steps to Dissolve a Partnership

  1. Review the partnership agreement: The first step in dissolving a partnership is to review the partnership agreement. This will help you determine the terms for dissolution, including any provisions for asset and liability distribution.
  2. Notify stakeholders: Once you’ve reviewed the partnership agreement, you must inform your employees, customers, vendors, and other stakeholders of the dissolution. Provide details on how the dissolution will affect them, and be transparent and honest in your communication.
  3. Develop a plan for dissolution: Next, you’ll need to develop a plan for dissolution. Determine a timeline for the dissolution, decide on the method for dissolution (e.g. selling the business or liquidating assets), and determine the allocation of remaining assets and liabilities.
  4. Finalize: Once you’ve developed a plan, you’ll need to finalize the dissolution. This includes completing all legal and financial obligations, notifying relevant authorities and government agencies, closing all business accounts and cancelling any licenses or permits.
  5. Communicate the outcome to stakeholders: After the dissolution is finalized, you must communicate the outcome to stakeholders. Notify them of the dissolution outcome and provide any necessary follow-up actions or contacts.

Dissolving a partnership when there’s no partnership agreement in place

If no partnership agreement exists, dissolving a partnership in the UK can be more complicated. Without an agreement, partners may have different ideas about how to dissolve the partnership, and it may be harder to determine the allocation of assets and liabilities.

In this case, partners must rely on the Partnership Act 1890 (the Act) to determine the process. Under the Act, there are certain circumstances under which a partnership can be dissolved automatically without the need for notice or agreement among partners. These circumstances are outlined in Section 32 of the Act.

The Partnership Act 1890 outlines several reasons for partnership dissolution, including:

  1. Expiration or notice: A partnership is dissolved by the expiration of a fixed term, the termination of a single adventure or undertaking, or by any partner giving notice to dissolve the partnership in the case of a partnership with undefined time.
  2. Bankruptcy, death, or charge: Every partnership is dissolved as regards all partners by the death or bankruptcy of any partner, or if any partner suffers their share of the partnership property to be charged for their separate debt.
  3. Illegality of partnership: A partnership is dissolved if any event happens that makes it unlawful for the firm’s business to be carried on or for the firm’s members to carry it on in partnership.
  4. Court decree: The court may decree a dissolution of the partnership in certain cases, such as when a partner is found to be permanently unsound of mind or has conducted themselves in a way that is calculated to prejudicially affect the carrying on of the business.

How to Dissolve a Limited Liability Business Partnership (LLP)

An LLP, or limited liability partnership, means neither business partner can be held liable for the other 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