A partnership, as defined by the IRS, is when two or more people come together to perform a trade or do business. Individual partners may contribute money, labor, skill, and property while also sharing in the profit and loss of the business.
If you wish to dissolve a business partnership, there are certain considerations and steps you must follow, from a legal and tax standpoint.
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- Refer to the partnership agreement.
Your original business partnership agreement likely has language around dissolution of partnership as well as dissociation of partnership. This is when one partner wants to get out of the business while others remain, and the business continues. Refer to the partnership agreement and follow whatever guidance it provides. If you don’t have a partnership agreement, you must abide by whatever your state laws are for partnership dissolution. You can also refer to the Uniform Partnership Act, which has been adopted in many U.S. states. - Consult with business attorney.
Business law can be complicated and if you’re planning to dissolve a business partnership, a business attorney is a must. Even if you have a partnership agreement, it’s wise to have legal counsel to help you think through areas of your business you might not have considered to help make sure you won’t be liable—or taxable— in the future. - Consult with your partners.
Breaking up with a business is often hard to do, but this is no time to bury your head in the sand. Open communication is key to successfully transitioning to the next phase of your life and shutting down shop as gracefully as possible. Commit verbally, and if possible, face-to-face or via Zoom, so you can see each other’s emotions and facial expressions. Be honest and respectful and request the same of other partners. Focus on the intended outcome, whatever that is for all of you, and strive to get there amicably. Be forthcoming with information, concerns, and hesitations. Get everything out in the open—and be sure to rely on your business attorney for guidance. An attorney can be a helpful third party as you navigate partnership dissolution. - File dissolution paperwork.
Unless your business partner agreement indicates otherwise, all partners must sign an agreement to dissolve the business. You would then file the dissolution paperwork with the state. This indicates you are no longer a business partnership, and you will no longer be liable for its debts (after you ensure your debts are cleared, of course). If you are in a situation in which some partners wish to dissolve but others do not, there may be a buyout option, or your partnership agreement may have a clause indicating what to do. A business attorney can help at this point, if needed. - Pay outstanding debts and liquidate assets.
Just because you’re dissolving a business partnership doesn’t mean you’re not liable for its debts. You still have to pay any outstanding bills and figure out what to do with equipment, if applicable, and any other assets that need to be liquidated. Collaborate with your partners to determine how to go about this. If you are unable to pay your debts, you’ll need legal counsel on how to manage debt that cannot be paid.
- Refer to the partnership agreement.
- Communicate to employees, clients, vendors, and suppliers.
Once you have come to an agreement with your partners that you’ll be dissolving the partnership, determine a coordinated approach to communicating the dissolution to employees and clients as well as any vendors you work with. People connected to your business deserve to hear the news in a professional, organized manner vs. through the grapevine. It’s best to come up with a communication strategy that honors the work you’ve done together and preserves your reputation in the industry. - File final tax return.
You’ll need to file your last federal and state taxes, marking them as “final” in the appropriate box. Any payroll taxes and employment tax paperwork will also need to be handled if you had employees. Be sure to pay attention to other types of taxes such as sales or occupancy tax. Let those agencies know to cancel your tax certificates and you’ll also need to file those related final returns. After all of that is complete, you can cancel your federal employer identification number. - Limit future liability.
While you’re in a business partnership, you are personally liable for its debts and obligations. Once the business partnership is dissolved, however, you are no longer obligated. But you could be sued after the partnership has ended, depending on the circumstances. It’s critical to work with a business attorney while you’re dissolving a business partnership to ensure you’re protected from future litigation.
Questions about dissolving a business partnership?
Talk to a business attorney at 215.568.4480
