Winding up a partnership refers to procedures that are taken to distribute or liquidate any remaining partnership property and assets that is remaining after a dissolution of a partnership business. Only partners that are still remaining with the partnership have the right to partnership assets during the winding up process.
The procedure of winding up a partnership involves:
- Collecting remaining business assets
- Settling any remaining debts owed to non-partner creditors
- Distributing the remaining assets to the remaining partners
When Does Winding up a Partnership Business Occur?
Winding up a partnership business occurs after dissolution of the partnership and it is similar to liquidation of the partnership. Typically when partners decide that there is no sustainable future for the partnership to continue, then the decision of winding up the partnership occurs.
The two basic ways of winding up a partnership business are:
- Creditor Petition: A creditor who is owed debt by the partnership business can petition to wind up the insolvent partnership in order to satisfy the debt owed by the partnership.
- Partners Petition: Partners can petition to wind up the partnership concurrently if they believe that the partnership does not have a sustainable future. Partners can only do this if there are no bankruptcy petitions pending.
What Are the Laws Governing Property Distribution in a Partnership?
In a partnership, the partners hold title to partnership properties as "tenants in common" or "tenants in partnership." This means that each respective partner has equal rights to the partnership property as long as the use of the property is restricted to partnership purposes. The property must be used according to the terms set out in a partnership agreement, if one exists between the partners.
The laws governing property distribution in a partnership are determined based on whether the partnership business is a general partnership or a limited liability partnership. The laws may also vary according to local jurisdictional rules.
How Is Property Distributed in a Partnership?
The actual property distribution will most likely occur when dissolving a partnership. Upon dissolution (also known as termination or “wind-up”), each partner is allowed to have their partnership applied toward the payment of their partnership debts. Once the debts are paid to creditors, any surplus from the property will be distributed to each partner according to their ownership interest in the partnership.
If the partners drafted a partnership agreement prior to the formation of the partnership, then the partnership agreement controls. However, if there is no partnership agreement, the partnership liabilities must be paid in the following order:
- Debts owed to non-partner creditors for partnership debt
- Those owing to partners other than for capital and profits
- Those owing to partners for capital
- Those owing to partners for profits
How Is Property Distributed in a Limited Partnership?
The laws governing the distribution of property in a limited partnership and winding up their property is basically the same as a general partnership. However, a limited partner has priority in getting paid.
If there is a limited partner within the partnership who has limited liability for the partnership debt, the limited partner has the same rights of a general creditor with respect to debts owed by the partnership that exceed his limited liability contribution. For example, if a limited partner contributed $100,000 and he is only liable up to that amount, any loans or advances by the limited partner exceeding that amount must be reimbursed by the general partners.
Do I Need a Business Lawyer?
If you have any questions regarding partnership property, you may wish to contact a business lawyer for advice. Your lawyer will be able to assist with tasks like drafting a partnership agreement, identifying partnership property, and filing a lawsuit in court.