It is highly recommended that you have a written partnership agreement any time you establish a business partnership. Nevertheless, many small businesses operate without one.
If you get along well with your partners, you may feel that a partnership agreement is unnecessary.
However, leaving a partnership without an agreement can be challenging. If your Partnership Agreement does not include a clear exit or dissolution strategy, you and the other partners can attempt to negotiate the terms together. However, if an agreement cannot be reached in a friendly manner, the Court has the authority to divide the assets and liabilities of the partnership.
Partners in a business without a written partnership agreement are not permitted to receive a salary. Instead, they distribute the profits and losses equally among themselves. This agreement serves to define the rights, responsibilities, and obligations that each partner holds towards the company and towards one another.
If you are considering leaving a business partnership, it is important to consult with an experienced partnership attorney.
There are many things you will need to address in winding down a partnership. You will want to make sure you receive your fair share of the business and that you aren’t on the hook for obligations you shouldn’t be responsible for.
You may even need professionals to evaluate your assets and liabilities. An attorney can help you protect your interests and make a clean break from the partnership.
Contested v. Uncontested Departures
There are a number of reasons you may need to dissolve a partnership, such as:
- Retirement of a partner,
- Death of a partner,
- One partner no longer wishing to participate in the business,
- Bankruptcy of a partner,
- Serious disputes within the partnership, or
- One partner’s illegal or wrongful actions harming the business.
In many circumstances, one partner’s departure will be uncontested. For example, a partner may be ready to retire, needs to move, or simply wants to go in a new direction with their career. The other partner or partners will likely support the decision, and all that will remain is to determine how to wind up the partnership or buy out the departing partner’s interest.
However, when one partner wishes to dissolve the partnership due to disagreements on how to operate the business or because they believe another partner has behaved wrongly, the dissolution may be contested. A contested departure can be particularly complicated with no partnership agreement. There is likely to be animosity and suspicion between the partners. This may make it difficult to reach a fair resolution.
There are various factors that can lead to the dissolution of a partnership. Some of these include the unfortunate event of a partner’s death, the addition of a new partner, and the insolvency of an existing partner. These circumstances can significantly impact the dynamics and viability of the partnership, ultimately leading to its dissolution.
7 Steps to Dissolve Your Business in Michigan
The process of dissolving a partnership in Michigan involves several steps.
1. Review Written Agreements
If you do have a partnership agreement, review it thoroughly to understand any terms it establishes for dissolution. Review all other written agreements between yourself and your partners to determine whether they say anything about dissolution. You should also gather all contracts, leases, promissory notes, mortgages, account statements, and any other agreements you or the partnership is a party to.
2. Consult a Partnership Attorney
Once you have gathered your documents, it is time to reach out to a partnership attorney. Your attorney can help you craft a strategy for leaving a partnership without an agreement while protecting your interests. They can also advise you on how to address the matter with your business partners.
3. Discuss Dissolution with Your Partners
Once you’ve decided to leave, you should notify your business partners of your intentions. This may be achieved through a partnership meeting, especially if your relationship with the partners is good. If you are leaving due to serious conflicts within the partnership, you may consider having your attorney communicate your plans.
4. Negotiate a Separation Agreement
If you have a partnership agreement, the terms of the agreement will likely dictate most of the terms of separation. However, it is still a good idea to negotiate a separation agreement that more precisely defines things like how and when assets will be delivered or obligations will be paid.
If you are dissolving a partnership without an agreement, then you will need to negotiate all terms of the separation.
A separation agreement will include things such as:
- The method of calculating the value of the partnership and its assets;
- How much money you are owed for your share of the business and how it will be paid;
- What partnership assets you may be entitled to;
- How and when your name will be removed from contracts, leases, assets, etc.;
- Whether and how you will be indemnified if the remaining partners default on any obligations;
- Who is responsible for outstanding taxes or other debts and how they will be paid;
- Mechanisms for enforcing the separation agreement; and
- Remedies that may be available if a party breaches the separation agreement.
If the other partners intend to carry on the business after your departure, it is especially important that the separation agreement protects you from liability for actions the other partners may take in your absence. For example, if your name is on contracts that will continue after your departure, the agreement should state how the other partners will indemnify you in case of a future breach.
If you are dissolving a partnership without an agreement and you can’t agree, then the terms of dissolution will be based on the Michigan Uniform Partnership Act.
5. Address Unresolved Matters in Court
If you cannot reach an agreement regarding important terms of dissolution, you may need to take the matter to court.
A Michigan court will consider any allegations against a partner that might affect the propriety of dissolution or their interest in the partnership, such as:
- Breach of fiduciary duty,
- Breach of contract, or
- Criminal behavior.
The court will then issue an order regarding how you are to accomplish the dissolution, based on the default terms of the Uniform Partnership Act.
6. Wind Up the Partnership
Once the separation agreement is finalized, you and the other partners will need to take steps to comply with its terms. This may include things like:
- Selling or distributing assets;
- Paying off debts;
- Distributing partnership funds or paying agreed buyout amounts;
- Refinancing assets;
- Renegotiating contracts; and
- Paying taxes.
Your separation agreement should set up a realistic timeline for accomplishing each of these tasks.
7. Notify Everyone
When you are leaving a business partnership, you should notify your clients, creditors, suppliers, and anyone else you do business with that you are leaving. Giving others notice that you are no longer involved in the business will help protect you from future liability.
How to Get Started with a Partnership Dissolution
If you are ready to move forward with a partnership dissolution, contact the partnership attorneys at Miller Law today. We can help you determine how to proceed, whether or not you have a partnership agreement. Our nationally recognized firm has been helping small businesses in Michigan for nearly 25 years. Call or contact us today to learn more about what we can do for you.