Partnership dissolution refers to the termination of a partnership as well as the cessation of its various business activities. Partnerships can dissolve for various reasons and under many circumstances. When a partnership dissolves, the partners share equally when it comes to profits and gains; however, they also share equally in the distribution of losses as well.Also, there are generally no tax consequences from dissolving a partnership; however, the partners do need to account for all properties involved in the business and whether or not they have appreciated in value over time.
Usually, general partnerships will dissolve if any partner withdraws, becomes deceased, or otherwise becomes unable to continue their duties as a partner. Other circumstances that may lead to partnership dissolution may include:
- Loss of profits or declaration of bankruptcy
- Illegal activities or violations
- Merging of a partnership with a larger entity
- Changes of the business’ registration status (such as switching to a corporation)
- Fulfillment of conditions stated in the partnership agreement (such as the production or sale of a certain number of products).
Lastly, some limited partnerships may not dissolve automatically if a partner withdraws or becomes deceased. The company may continue on, especially if the partnership still has sufficient managerial capacity to keep up with business activities.
Partnership by estoppel is where the court declares a person to be a partner even though they have not formally registered as a partner with the company. This can happen for instance, if a person is acting on behalf of a partnership, and is behaving as if they were a partner, and was given authority to do so by the partners. In the event that a person wishes to sue them, they may be declared a partner by the court.
In such cases, once a person is declared a partner by estoppel, it is as if they are a normal partner in the business. Therefore, termination or dissolution of the partnership may occur if that person withdraws from their participation in the organization. This of course may depend on state laws as well as the individual characteristics of the partnership and the agreement documents.
Business partnership laws can sometimes involve very technical laws and legal concepts. You may need to hire a business lawyer if you need help with business laws or if you need any legal advice regarding partnerships. Your attorney can represent you in court and can help you with your case if you need to be involved in a partnership lawsuit.