5 Steps to Dissolve a Business Partnership

If you want to dissolve a partnership and close your business, you'll need to take several steps to do it right. Unlike corporations and LLCs, which file with the state when they are created and terminated, a general partnership doesn't need to make any sort of dissolution filing with the state. (A limited partnership registers with the state upon formation and should make a dissolution filing with the state, as discussed below.)

But resist the temptation to end your partnership 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.

Here are five steps to follow when dissolving a business partnership.

Step 1: Review and Follow Your Partnership Agreement

Although the law doesn't require partnerships to have partnership agreements, many have them. A partnership agreement is a road map that outlines the internal rules for managing the business.

A good partnership agreement includes terms for dissolving and winding up the partnership. If you have a partnership agreement that addresses dissolution, follow the process it describes, especially for Steps 2 and 4 below.

If you don't have a partnership agreement, or if you have one but it is silent on dissolution, you will instead follow your state's laws on dissolving partnerships.

Step 2: 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 doesn't 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.

What Happens When Partners Don't Agree to Dissolve?

If the partners don't vote unanimously to dissolve, and the agreement or state law won't allow the business to close without a unanimous decision, your partnership might have the option to buy out the partner(s) who want to leave the business.

In this situation, instead of dissolving the partnership, the remaining partners can keep the enterprise going. If you aren't able to agree on a buyout price, you can hire a third-party mediator to resolve the conflict—or as a last resort, file for a court-ordered dissolution. Going to court can be expensive and time-consuming, and it's best to have an attorney help you through the process.

Step 3: 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.

Step 4: 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 isn't 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 can't 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 doesn't 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 (investments in the partnership), and then distribute any remaining assets equally.

Step 5: File Final Tax Returns and Cancel Tax Accounts

File your final tax returns 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 the relevant 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 liability ends once the partnership closes.

That said, 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 others say that partners remain personally liable after dissolution.

It's possible for a partner to be liable for post-dissolution debts and obligations incurred by another partner, if the third party is unaware of the dissolution and believes that they are dealing with the partnership.

You can reduce the chances of being personally liable for such future debts by publishing a public notification that your partnership has dissolved, as described above. You should directly notify partnership creditors, such as suppliers and lenders, that partnership has been dissolved. .