Breaking Up (Partnerships) Is Hard To Do
July 22, 2015
Breaking Up Is Hard To Do
Breaking up is the hardest thing we do. It’s the most important thing we do, in a way. You’ve got to embrace rejection, or you’ll maintain a very limited life. It’ll be very nice and neat – and very, very small. — Laurie Helgoe, American Psychologist
As Doo-wop star Neil Sedaka famously sang, in 1962, breaking up is hard to do. Still, breaking up is important–even necessary–for our growth. This is true in business as well as in our personal relationships. Still, that doesn’t make it easy. In the rest of this article, you’ll find helpful information that should make breaking up a business partnership just a little bit easier. Maybe you should also listen to the song. It might make you feel better.
Containing the Fallout
Under RUPA, the definition of “dissolution,” with respect to Partnerships, differs a great deal from the lay understanding of that term. “‘[/fusion_builder_column][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][D]issolution’ refers to a change in the composition of the partners themselves, while ‘winding up’ or ‘liquidation’ refers to the process of selling off the partnership’s assets, paying off creditors, and settling up profits and losses between partners.”1 Sometimes, dissolution causes the wind-up of a partnership; but this is not always the case. “Thus, it is helpful to keep the concepts separate in your mind (i.e. dissolution on the one hand, and winding up/liquidation on the other). Cf. UPA § 29 (indicating that a partnership is not ‘terminated’ upon dissolution and is instead continued until the ‘winding up of partnership affairs is completed’).” Id. at p. 109.
It’s also useful to note that your written Partnership Agreement (You are using one, right?!), may allow you to circumvent some provisions of the UPA or RUPA. For example, the “UPA provides four … grounds for dissolution that are not explicitly designated as rightful or wrongful: (1) any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership;” (You’re probably best off leaving that one alone, actually. It’s a good one.) “(2) the death of any partner; (3) the bankruptcy of any partner or the partnership; and (4) a decree of court under [UPA] § 32.” Id. at p. 110. (You also probably can’t get rid of #4.)
Under RUPA, dissolution is slightly different, but winding-up and liquidating partnerships is a little more limited, and additional guidance is provided on issues like expelling partners, among other minor differences. Still the essence of both regulatory schemes is the same. The point is: some things are going to automatically trigger dissolution of your partnership, and you want to use your written Partnership Agreement to limit such events to the ones you actually want to trigger dissolution of your partnership.
Winding-Up and Liquidation: Your Partnership’s Estate Sale
Of course, your written Partnership Agreement (which you are definitely using, because you are a smart, responsible business owner) may provide otherwise, but, generally speaking, partners who have not wrongfully dissolved a partnership have a right to wind up the partnership. “Winding up” (often called liquidation) is the process of settling partnership affairs after the partnership is dissolved.
Usually, the wind-up process involves selling assets for cash, using that cash to pay off any creditors of the partnership, and paying to the remaining partners (the ones whose partnership interests have not been wrongfully dissolved) the value of their interest in the partnership according to their share of ownership. Basically, in very simple terms, the partners sell everything the partnership owns, pay off the creditors and distribute the surplus amongst themselves, according to each partner’s share of ownership.
Invest In the Guidance You Need, Avoid Litigation
As I repeatedly said at the beginning of this article, breaking up (partnerships) is hard to do. It’s hard for a lot of reasons. Money is involved. People have feelings, which can be hurt. There are issues of “legacy” and “ownership” and all sorts of other complicated personal, emotional, and business considerations involved. Partnerships are like marriages, and when one breaks up, it’s like a divorce. Sure, some are amicable; but how many of those have you seen?
You would be well-served to engage General Counsel for your business, and to use your General Counsel’s services to help you through the difficult process of dissolving your Partnership. Dissolution of a Partnership is not something you want to attempt on your own. It’s complicated. It’s fraught with emotion. It’s a high-risk proposition, meaning there is a high risk of an expensive lawsuit, if not done correctly. Your General Counsel can help guide your company through the dissolution process, assure all the partners their interests are being respected and considered, and minimize the risk of unnecessary, expensive litigation.
Contact Executive Legal Professionals if you need General Counsel services. We’re here to help. Thanks for reading.
1 Hamilton, Robert W., Jonathan R. Macey, and Douglas K. Moll. “Chapter Three. The General Partnership.” Cases and Materials on Corporations, Including Partnerships and Limited Liability Companies. 11th ed. St. Paul: West/Thomson, 2010. 109-135. Print.
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