Who gets what when a business partnership ends?
Published 26 Jun 2019
Dissolving a partnership isn't as simple as splitting the business however you like. There are certain rules and regulations you must adhere to, which vary according to how you set up your business and the state you operate in. One of the main factors in how many decisions you have to make is whether or not dissolution is dealt with in the terms of your partnership agreement.
What is the partnership agreement?
Generally, it's the written partnership agreement that determines how the business assets are divided. While there are no hard and fast rules, it should deal with:
- Who contributed financially, and by how much and when.
- Partnership shares and assets.
- What rights and liabilities of each member of the partnership.
- How long the partnership should last.
- How the departure of an existing partner will be managed.
- Steps for resolving disputes.
The overall purpose of a partnership agreement is to ensure all members are clear about rights and obligations both during and after the life of the partnership.
What can you split and how do you do it?
Assets you may think about dividing or handing over to one partner include:
- Profits and losses.
- Customers or clients.
- Properties or premises.
- Intellectual property - such as the business name or website.
Ideally, your partnership agreement is so watertight that every eventuality is catered for. You may have agreed that if a partner funded 20 per cent of the business, they get 20 per cent of the value. Alternatively, you may have decided that the value of the business is to be halved.
As each partnership operates slightly differently, exactly how you split what you own is completely down to you. Perhaps only one of you actively operated the business, the other member was simply a financial investor. If that's the case, it might be that the latter only gets their percentage investment back, and all other parts of the business are owned by the person who ran it.
What happens if the partnership is continuing after someone exits?
Again, this partly boils down the partnership agreement, and how this type of situation should be dealt with. In essence, the exiting partner has just as many rights as those remaining and it is up to everyone to agree how to divide the assets. Until an agreement is reached, all partners retain their share. As a new partner enters the business, a new partnership agreement should be created to support the new formation.
To ensure your partnership has the protection and regulation it needs, speak to the team at Malouf Solicitors for legal advice.
Please call us on 02 8833 2000 to speak with a lawyer
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