Leaving a partnership is serious business. If you are planning to leave a partnership but you do not have a partnership agreement, you are taking the risk that everyone will work things out without major conflicts. While that may be what happens, it’s a risky move as many partners end up in disputes. That said, without a partnership agreement, applicable state law will take effect and most likely the partnership will have to dissolve, whether the partners want it to or not.
If you find yourself leaving a partnership without an agreement, consider protecting yourself by taking the following steps before you make anything official:
Get Your Records Organized
Gather any partnership records you have and organize them. Keep them accessible and safe. You will need to refer to them as questions arise, and no doubt your attorney and tax adviser will need access to them as well.
Because you have no partnership agreement, you may be surprised to learn that one question you could face is whether a partnership was ever created in the first place. Documents such as a signed contract, business plan, sworn testimony, emails, bank statements and transaction records will prove that a partnership actually exists — or not.
Get a Handle on the Partnership Assets and Liabilities
Make a list of all partnership assets and liabilities. Assign values to the assets. If there are any questions about valuation, you may need to get a third party’s opinion on value. A third party’s opinion on value will help you resolve disputes over valuation. In a perfect world, your partnership documents will have set forth a process for valuing the assets and liquidating them.
Proceeds from the sale of assets should help pay off outstanding partnership liabilities. In a dissolution, each partner will be able to apply their share of the partnership assets to the payment of the partnership debts. Once the partnership creditors are paid, any surplus from the asset sales will be distributed to each partner according to their ownership interest in the partnership. For example, if a partner has a 30% interest in the partnership, that partner will be entitled to 30% of any assets left over after the partnership debts have been paid.
Get Familiar with Your State’s Provisions
In the absence of any type of agreement, the provisions of your state’s Uniform Partnership Act will become the default for the dissolution process. The Uniform Partnership Act establishes the basic legal rules that apply to partnerships and will control many aspects of your departure unless you have a written partnership agreement that provides otherwise.
Separation Agreement to Prevent Partnership Dissolution
When one partner wants to leave the partnership, the partnership generally dissolves. Dissolution means the partners must fulfill any remaining business obligations, pay off all debts, and divide any assets and profits among themselves.
Your partners may not want to dissolve the partnership due to your departure. You can prevent a forced dissolution by entering into a Separation Agreement with your partner(s). Your attorney can draft one for you. A Separation Agreement will spell out the terms of your departure and require the partnership to have your name removed from any partnership transaction and loan documents going forward.
Having yourself removed from partnership loans and contracts is one of the most important things a Separation Agreement can require. Clearly, any such Separation Agreement will likely require the consent of the other partner(s) and some degree of renegotiating the partnership’s outstanding liabilities such as loans, leases, and contracts. Your attorney can help you with this and can draft any required documentation to finalize the agreement.
Other significant matters that the Separation Agreement should address include the following:
- Description of the manner of distribution of assets and liabilities.
- Formal assurance that you will not be held liable for future lawsuits or negative judgments.
- Mechanisms for ensuring debts from which your name cannot be removed are paid.
- Description of the consequences of a partnership breach of its obligations to you.
- Right to audit the partnership books.
Be aware that questions about leaving a partnership without an agreement will focus on the division of assets held by the partnership and paying off all outstanding business debts. Your attorney can help you with this process.
How to Reach a Separation Agreement with Your Partners
As noted earlier, in the absence of a written partnership agreement that addresses a partner’s departure, you will have to talk to the other partners and try to negotiate agreed upon terms which would be included in the Separation Agreement. Your goal will be to remain on amicable terms to avoid an impasse or conflict that could hurt everyone’s business interests.
Ways to do that include:
Offer to Sell Your Interests to Your Partner(s)
When you let your partner know you are planning to leave, you can offer to sell them your shares and let them continue running the business. You will need to have a reasonable price in mind, preferable one that is based on some market analysis that you have done before now. If there is a disagreement on the right price, suggest an independent expert be given the job of ascertaining an appropriate value.
Offer to Accept Less
You can express your willingness to take less of the profits from the business and refrain from participating in decisions about the company until everything is settled.
Express a Willingness to Hire an Independent Intermediary to Resolve Outstanding Issues
Be willing to engage a third-party intermediary (such as an experienced attorney or dispute resolution specialist) to help you split the partnership assets among the partners or to agree on valuations and other terms you cannot agree to.
Seek Legal Advice From An Expert Attorney
Even if the departure is amicable and you follow all the aforementioned steps, disputes can arise. The more complex the partnership and the partnership’s business, the more important it is that you have a competent legal advisor who can help you resolve issues and retain your assets. An experienced business attorney can help you negotiate acceptable terms and comply with applicable state laws. They can also help partners who sue the partnership or their partner determine the best route to achieve the results they are hoping for.
While analyzing the legal underpinnings of the case will require a significant financial investment, the subsequent savings will more than make up for the cost. A solid litigation plan, after all, is the best way to succeed in reaching your litigation goals. Contact the Litigation and Dispute Resolution Attorneys at KPPB LAW for more information regarding your situation.