A partnership exists whenever two or more persons go into business together. A general partnership–one where the partners share all profits and losses–does not require a written agreement to exist. Of course, it is generally advisable to have one. Other types of partnerships, such as limited partnerships, may include both general and limited partners, with the latter only sharing in any profits but not liabilities or managerial control.
In any partnership, there may come a point where one or more partners wish to end their arrangement. This is known as dissolving the partnership. Dissolution can be achieved in a number of ways under California law. If the business was a “partnership at will”–that is, there was no fixed term previously agreed upon for the partnership–then the “express will to dissolve” of at least half the partners is sufficient for dissolution. This includes any partners who have lawfully disassociated themselves from the partnership within the past 90 days.
If the partnership had a fixed term or was organized for a “particular undertaking,” then dissolution can occur when that term or undertaking comes to an end, or again if there is an “express will” among the partners to dissolve. Similarly, if there was a written partnership agreement in place, then it may specify what events can trigger a dissolution.
Filing a Petition for Judicial Dissolution of a Partnership
California law only allows any partner to apply for a “judicial determination”–file a lawsuit–to seek a court-ordered dissolution of the partnership. Before a judge will take such action, however, they must be satisfied that one of the following conditions exist:
- The economic purpose of the partnership is likely to be unreasonably frustrated.
- A partner, other than the one who filed the petition, engaged in conduct that was related to the business and thereby has made it impractical to carry on the business.
- It is not otherwise reasonably practicable to continue the business under the terms of the partnership agreement.
Basically, if a judge determines that the relationship between the partners has deteriorated to the point where it is no longer possible for them to continue operating the business together, dissolution should be ordered. This can include a situation where one partner has wrongfully violated or “repudiated” the written partnership agreement. Although a partner could simply seek monetary damages against the non-compliant partner for such actions, California courts have said the aggrieved partner is also entitled to ask for dissolution as a remedy.
What Happens After a Partnership Is Dissolved?
Whether dissolution is by mutual agreement or court order, the process of “winding up” the partnership is largely the same. The partnership must complete any works or projects that are in progress. The court can order the partnership to sell its assets. After any business debts are paid, whatever remains is then divided among the partners. Keep in mind, creditors must always be paid first before any partners. It is also a good practice to notify any customers, clients, or suppliers, of the dissolution.
Again, the process to dissolve a partnership will typically go much more smoothly if the partners already had a written agreement in place. Absent such an agreement, it may be left largely to the discretion of a judge to decide how the business will be brought to a conclusion.
If you need legal advice from an experienced Riverside, California, business litigation attorney in conjunction with any form of partnership dispute, contact Wagner Zemming Christensen, LLP, today to schedule an initial consultation with a member of our team.