Many businesses that have more than one owner tend to be in a partnership. A business can enter into a formal partnership or remain a partnership informally. It is recommended that business partnerships enter into specific agreements regarding how they operate and terminate their partnership. When no agreement exists regarding how a partnership will terminate, state laws will apply. Disagreements between owners of partnerships can lead to litigation.
It is best to iron out details in a partnership agreement to ensure all parties know what to expect regarding the operation and termination of the partnership. Enlist the Philadelphia business lawyers at Harty Law Group for assistance in business formation and litigation.
Ending a Partnership
It is important to understand that a legally-terminated partnership may still be taxed if certain steps are not taken. A partnership can accrue tax liability and should be technically terminated; otherwise it continues to exist for tax purposes. Termination and dissolution of partnerships are terms that are often used interchangeably; however dissolution and termination can have different consequences.
Dissolution occurs when a partner wants to retire, becomes mentally incapacitated, dies, or the partnership is in bankruptcy. When dissolving a partnership, notification of such dissolution must be given to several different agencies and companies. Also, all owners of the partnership must agree to dissolve the partnership.
A certificate of dissolution must be filed with the Secretary of State of the state where the partnership is registered. All assets must be liquidated. A thorough accounting of the assets and debts needs to be made. Creditors must also be notified so that all debts are paid before the official dissolution of the partnership. Owners must first pay off all debts owed by the partnership before dividing the assets between themselves. If the partnership lacks sufficient funds to pay the creditors, the individual partners may need to contribute into the partnership to pay off the debts.
A partnership agreement should detail what should occur in terms of distribution of assets in the event of dissolution, death, or resignation of a partner. It is important to define whether owners can have a right to buy out the interest of the other partner in case of death or resignation. It is best practice for partners to prepare and plan the procedure for distribution of assets, payment of debts, and termination of a partnership to avoid uncertainty and risk legal exposure.
Additionally, a partnership must also notify the Internal Revenue Services (IRS) of its termination; otherwise, it will continue to exist in the eyes of the IRS. Ending a partnership before the IRS is referred to as a “technical termination.”
Termination before the IRS occurs when one of two events take place. It can terminate when all operations of the business cease. All owners of the partnership must stop all ventures including the execution of business and financial transactions.
Alternatively, a partnership can terminate if in the span of 12 months, at least 50 percent of the total interest in the partnership capital and profits are sold or exchanged. A sale or exchange can occur between one partner and another. Unlike dissolution discussed earlier, for tax purposes, death of partner does not terminate the partnership before the IRS because the partner’s heirs can inherit the partnership.
Philadelphia Business Attorneys at Harty Law Group Advise Business Owners on Creating and Terminating a Partnership
The Philadelphia business attorneys at Harty Law Group have extensive experience as outside general counsel for small businesses, startups and multinational companies. Avoid future risk and uncertainty, consult our offices regarding partnership agreements and dissolutions. Contact us online or call 267-383-3899 to arrange a meeting and discuss your concerns. Our offices are located in Philadelphia and Haddonfield, New Jersey. We serve clients across Pennsylvania and South Jersey.