Business owners might want to dissolve their partnership for multiple reasons. One of the partners may retire, or financial struggles require closing or restructuring the company.
Proceeding with caution is crucial regardless of the reason you want to dissolve your partnership. You must protect your interests and your business.
Here, you will find helpful information about how to approach dissolving a business partnership agreement and the steps you must complete.
Why You Should Consider Dissolving Your Partnership
Dissolving a partnership is removing an existing partnership between two or more people. Sometimes, partnerships are dissolved because it’s in the best interests of everyone involved. Disputes can arise that no one can resolve, or one person might decide to leave the company.
The most common reasons dissolving a partnership might be a good idea are:
- Two partners can’t agree on a business strategy
- One partner isn’t performing at the same level as other partners
- The partnership agreement reached the agreed-upon timeframe
- One or more partners want to retire
- Two or more partners constantly argue over business decisions, causing a strained personal relationship
Steps Involved in Dissolving a Partnership Agreement
You must follow multiple steps to dissolve your partnership entirely and correctly and mitigate your liability under your existing partnership agreement. These steps include:
- Review the partnership agreement – Before doing anything else, reviewing your partnership agreement is essential. Although state law doesn’t require a written agreement, having one is a good idea. If you have one, look at the provisions for dissolution.
- Vote or proceed with dissolution – If you and your partners created a partnership agreement, dissolving the business might require a vote. It’s common for business owners to require a majority of partners to vote on issues like this. Conflicts might require court interventions.
- Distribute assets and pay debts – You must address the financial aspects of the company once the necessary number of partners agree to dissolve the business. You can refer to your partnership agreement or discuss how to pay the remaining debts and distribute assets. You might sell business assets, use the proceeds to pay outstanding debts, and split any remaining assets among partners.
- File a dissolution form – You should file a dissolution form with the Secretary of state if you filed an official partnership agreement. The form will clearly show your intent to end the partnership and can limit your liability. The type of partnership you have will determine which form you should file.
- Notify affected parties – You should notify any parties with interests in the business of your dissolution. That can include customers, creditors, and suppliers. The notification should be in a written notice or publication the public can access for a specific period.
- Resolve taxes – The California Franchise Tax Board (FTB) requires filing a final tax return and paying state taxes for that return to dissolve a partnership. You can use Form 1065 to file your final federal tax return. You must file by the fifteenth day of the fourth month after the termination date if your partnership dissolves before the end of its normal tax year.
- File forms for out-of-state registrations – If you registered your partnership to do business in another state, terminating your right to conduct business in that state requires filing additional forms. The form you must file depends on the laws in that state.
Get Help Dissolving Your Partnership
The steps required to dissolve a partnership agreement seem straightforward. However, it can be time-consuming and result in legal battles if you don’t follow the steps correctly. You should hire an experienced Riverside business lawyer from Wagner Zemming Christensen, LLP, to represent you.
We can provide legal advice and guidance while protecting your interests. Call us at 951-686-4800 for a consultation if you want to dissolve your business partnership agreement in California.