Your business partnership is breaking up. Whether the breakup is a result of a planned termination, a partner dying, a falling out, or any other reason, the business is absolutely able to continue, but there are important steps that need to be taken to ensure that all the legalities and tax ramifications have been properly addressed.
The best way to address these questions is before the partnership is actually launched. A well crafted partnership agreement will contain an exit agreement that addresses the potential (or plan) for a partnership breakup, and spell out whether remaining partners have right of first refusal for purchasing the departing partner’s interests. Without a partnership agreement that specifically outlines conditions, the outcome for your business will be governed by whatever the statutes within your state say.
In order to dissolve your business partnership, there are several steps that you need to follow. You need to notify the governing agencies – as well as any companies that you do business with – that your partnership is dissolving. Only after you’ve made this official notification will you be able to continue operations. The agencies include whoever your business is licensed with. This may be the Secretary of State of a local agency. You’ll also need to fill out your tax returns appropriately for the funds owed by the partnership and pay off any outstanding debts. The IRS will consider a partnership breakup to be complete when all business operations are stopped with no ongoing business on behalf of the partnership or when at least half of the interest in the business capital and profits have been sold or exchanged within a one-year period. If you are interested in continuing the business on your own, after the partnership breakup, this would be the requirement that would best apply to your circumstances.
If your partnership breakup results in a shift of legal structure to a sole proprietorship, it generally means that you’ll be buying out your partner’s (or partners’) shares as well as the company’s assets and liabilities. You must have legal language in your partnership dissolution agreement that spells this out – otherwise those assets are divided equally among the original partners. For assistance with this and all other aspects of your partnership breakup, contact our experienced business attorneys today.