How to Dissolve a Partnership

You can dissolve a partnership informally, but taking the extra steps to wind up the business can limit your liability.

If you want to dissolve a partnership in order to close your business, you’ll need to take several steps. First, the partners will need to vote for the dissolution, and agree on how to distribute remaining assets. You’ll be spared from having to file dissolution papers with a state agency, because you didn’t need to file with the state when you started the business (unlike other business entities like corporations and LLCs, partnerships are fully created simply when the partners began doing business). But resist the temptation to close up shop too informally—taking the time to document the process and review all existing obligations will limit your liability for your soon-to-be-former partners’ future actions.

Review and Follow Your Partnership Agreement

Although the law does not require partnerships to have partnership agreements, many businesses have them. An agreement is a road map that outlines the internal rules for managing the business. If you do not have a partnership agreement, or if it is silent on the dissolution issues mentioned above, you will instead follow your state’s laws.

Vote on Dissolution and Document Your Decision

Take a vote among the partners on whether to dissolve the partnership. Document the decision by having all partners sign an agreement to dissolve. If your partnership agreement does not address the next steps for dissolution, such as how you will distribute profits, you can work out an arrangement now and include your decisions in the agreement to dissolve.

Send Notifications and Cancel Business Registrations

Within a reasonable time after the partners vote to dissolve the business, notify your employees and customers. Alert your vendors and suppliers, and review any existing contracts to address outstanding obligations, such as payments and work in progress. As discussed below, you might be personally responsible for carrying out the obligations in your contracts after the partnership ends.

If the partnership has any business licenses or permits, cancel those with the applicable licensing divisions. Check for any out of state business registrations, and notify the appropriate state agencies.

Pay Outstanding Debts, Liquidate, and Distribute Assets

Pay all outstanding debts, including taxes and wages. You might need to liquidate, or sell, partnership assets like real estate or personal property to pay the business debts. When the partnership is not able to pay a debt, the owners are responsible for chipping in to cover the difference. Creditors can sue the partners individually to collect any debt the partnership owes.

If any assets remain, distribute them to the partners per the partnership agreement. When you cannot split an asset, like real estate, you can either offset the property with other assets or sell the property and split the proceeds. If the agreement does not address distribution, refer to your state’s laws. Typically, state law provides that the partnership must first pay partners according to their share of capital contributions (the investments in the partnership), and then distribute any remaining assets equally.

File Final Tax Return and Cancel Tax Accounts

File your final tax return with the state and federal tax agencies. For federal taxes, and in many states, you will file the same annual return the partnership files every year, and you will mark it as “final” in the appropriate space. If your partnership had employees, deposit your final payroll taxes and file employment tax paperwork. If you paid any other taxes, such as sales tax or transient occupancy tax, notify those agencies to cancel your tax certificates and file final returns.

Cancel all tax accounts and identification numbers, including your federal employer identification number (EIN) and your state tax accounts. You must file all of your final tax returns before you can cancel your tax accounts.

Limiting Your Future Liability

Partners are personally liable for the debts and obligations of the partnership, but your obligations end once the partnership closes. You might be personally responsible for any contracts that you entered into during the partnership, depending on the language in the contract. Some contracts provide that the individual partners’ obligations end after the partnership dissolves, while other contracts provide that partners remain personally liable after dissolution.

You can take steps to reduce the likelihood that your former partner(s) can bind you to any future debts or obligations. Document your vote for dissolution (as discussed above). File a Statement of Cancellation, also known as a Certificate or Statement of Dissolution, with your Secretary of State. Filing is typically not a legal requirement, but gives a clear date for the end of the partnership. You can also publish a notification in your local newspaper, on your website, and on any business social media pages to alert the public and any creditors that your partnership has dissolved.

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