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Dissolving a Partnership

Going into business with a partner can be a great way to spread risk, to draw on each other’s skill sets, and to combine resources to grow your business. But, at some point, the partnership may not be serving either you or the business well. It might be time to dissolve it.

Dissolving a partnership is a delicate affair. It should be done in a respectful but efficient manner, and in a way that won’t hurt the surviving business. 

Signs that it’s Time to Dissolve a Partnership

If you’re unsure if it’s time to end your partnership, you may be picking up on some of these signs.

The first would be a mismatch between partners. A lack of fit can take the form of different business goals or vision for the business’ future. It could also be more serious, such as a clash over ethics or work ethic. If you’re noticing signs that the fit may not be there, and attempts to address them with your partner have failed, it could be time to split.

Another sign is if your partner acts in ways which damage the company’s reputation. If they make promises that they don’t or can’t keep, particularly over-promising to a customer, that’s an issue. If you catch them in an outright lie, or their behavior in their private life is intruding into work, again it could be time to move on.

It’s essential to address both of these issues quickly and take swift action before a partner does too much damage to the business. You don’t want to lose customers or have to rebuild your public reputation.

Do you find communication or accountability to be lacking? Your partner could have mentally checked out. If you’re putting in a lot of hours and they’ve forgotten the alarm code, their heart may no longer be in the business. A disaffected partner can hurt you as much as an unethical one.

If they did over-promise to a customer, did you two discuss it and did they accept responsibility? Can they take the blame, and do their best to fix the problem. Or were they full of excuses? Often your gut will tell you that they’re no longer an asset.

Hopefully, you can broach the subject of splitting up respectfully and with tact. They may even be relieved to be offered an exit strategy.  Make sure you talk to them when you’re calm, and try to avoid name-calling and emotional accusations. Once you know that it’s time to end the relationship you want to exit as smoothly as possible.

Making a Plan for your Business’s Future

Unless it’s a situation where the partner must go now, you’ll have some time to plan.

Before your partner packs up their desk, make a list of duties they’ve been handling. Try to get a good grasp on their responsibilities and what they’ve been contributing to the business. Then decide which of those items you can manage yourself, which can be done by other employees, or if you’ll need to hire someone.

If you want business to continue as usual, and are worried about your former partner poaching clients, you can specify a non-compete in your agreement. Or you can agree to divide those clients in half. What you’ll have to take into account depends on your business. In a service business, clients may be critical to keeping it running. In an inventory-heavy business, you may have to buy out your partner’s half of the assets.

Before splitting up the business, have a very clear picture of what it will cost you and how it could set you back financially for a while. Once you have a grasp on what will be involved, make a detailed plan.

Your plan should include a timeline, with deadlines, of when milestones must be done. Include tasks along the timeline and indicate who will perform them – plan for attorney fees, independent evaluation fees, accounting fees, and more. There will also be forms to file with the state and other authorities.

As much as you may want your partner gone, be realistic about this timeline. You will have to perform all the tasks of dissolving the partnership while continuing to run the business. And you might not be able to count on your former partner continuing to help or contribute.

Alternately, the future may involve selling the business and splitting the proceeds.  In some cases, this could be the simpler solution and would leave you free to build an entirely new enterprise.

How to Legally Dissolve a Partnership

When you formed the partnership, you likely had to file for an LLC or S-Corp. Depending on where you’re located, you might have filed state entity documents or applied for business licenses. If you’re not buying out your partner, you’ll have to take the following steps.

Pay all of the business’ debts and distribute all its assets between you in an agreed-upon manner. File a form with the state to dissolve your legal business standing and notify all customers, suppliers, and creditors. The state’s website for the Secretary of State will have the information you need.

There may be a period during which they can come forward and lay claim to the business’ assets for unpaid debt, during which you’re required to keep accounts. If you had employees, pay them all in full and make sure that you’ve filed all applicable payroll taxes. Talk with your accountant about filing any partial-year business taxes.

Remember that ignorance of the law is no excuse in the eyes of law, i.e., you can’t claim you didn’t know you had to pay taxes before closing your business to avoid tax penalties. Given the complicated steps involved, you might need to bring in experts.

When to Bring in the Experts

In a buyout situation, someone will need to evaluate your assets. Whether your assets include company cars, a building, or intellectual property, your partner will want to be compensated for their half of them. For smaller businesses, your accountant may be able to do this for you using your existing list of capital assets. Larger, more complex organizations will likely need to bring in an appraisal expert.

If you didn’t have a partnership agreement drawn up when you first went into business, you might have to seek legal counsel or mediation.  If you end up in court, it can become expensive. Informal partnerships may be easy to start but can be more difficult to end.

Legal liability, tax issues, and lawsuits can all be the result of an improperly ended partnership. Take the time to do it right to protect you, and your business, in the future.

Do you have the support you need to manage your small business bookkeeping? Schedule a 30-minute appointment to speak with a local small business adviser.

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