A legal partnership may dissolve in one of two ways. First, a partnership may completely disband and distribute its assets among partners and creditors. Second, a partner may leave the partnership due to death, bankruptcy or voluntary withdrawal. In this case, the partnership is legally dissolved, and a new partnership is formed. The terms of the dissolution of a partnership are governed by state law, the partnership agreement and, in some cases, a partnership dissolution agreement.
Automatic Dissolution and Fallback Rules
If a partnership continues to operate after a change in membership and the initial partnership agreement is not amended, the agreement will not necessarily govern the affairs of the new partnership, which could cause problems if a dispute arises. Instead, a court may apply state fallback partnership rules, applicable only in the absence of a partnership agreement, the terms of which may differ from the terms of the old partnership agreement.
Avoiding Fallback Rules
If the partners intend for the partnership to survive the addition or withdrawal of a partner, the partnership agreement should provide procedures for amending itself when partnership membership changes, so it will still govern the affairs of the partnership and state fallback rules will not apply. Some partnership agreements require the dissolution of the partnership upon the departure of certain key members. Either way, the partnership agreement should outline who is responsible for completing dissolution procedures, because a partnership can be dissolved by court order under certain circumstances, such as bankruptcy. These procedures include liquidation of assets, notification of suppliers, creditors and tax authorities, and the filing of dissolution statements. Dissolution statements are not required for general partnerships in many states.
Sale of Business
The partnership agreement, or a dissolution agreement drafted later, may specify that the partnership business is to be sold as a going concern when it dissolves. This works to the advantage of the partners if the partnership uses a trade name, because the price of the business can include the value of its goodwill, or the credibility of its name in the eyes of consumers. Even if the agreement specifies sale of the business as a going concern, include procedures for discontinuance of the business and disposal of partnership property in case a buyer cannot be found. The new partnership must not operate in the name of the old partners, meaning that partnerships that are not allowed to use trade names cannot be sold as going concerns.
Distribution of Assets
If the partnership cannot be sold, dissolution means that the business must be discontinued and assets distributed. Business assets other than goodwill, such as equipment, real estate and even intangible assets such as intellectual property rights can be sold. The partnership must satisfy its creditors before distributing assets to partners. It may distribute either assets or cash to partners, but must do so in the proportion specified in the partnership agreement or, if there is no partnership agreement, in the proportion specified by state law -- usually in proportion to partner capital contributions.