Given the prevailing use of limited liability companies, general partnerships have become increasingly rare, typically being relegated to industries like finance and real estate. Notwithstanding this, the dissolution of a general partnership is no less difficult. To best navigate the complexities, it is important to work with an experienced attorney who ensures that you follow the law, works to minimize significant disruptions throughout the process, and provides you peace of mind that your exit can be achieved with as minimal headache as possible.
Like other entities, the dissolution process for a general partnership begins with the governance documents, typically a partnership agreement. Well-drafted partnership agreements usually contain provisions that address the dissolution and the windup of the partnership in detail. In cases where the partnership agreement is silent or fails to fully outline the procedures, the first step is to try to negotiate the terms of the dissolution among the partners.
In addition to terms that may be outlined in the partnership agreement, New York's partnership law also provides that there are circumstances where dissolution occurs without violation of the partnership agreement and includes, but is not limited to, the terminations of the term or undertaking of the partnership agreement, the express will of any partner when no definite term or particular undertaking is set forth, by the death of a partner, or bankruptcy of a partner or the partnership.
Notably, unlike other entities, the partnership is not terminated upon dissolution. Rather it continues until the completion of the winding up of partnership affairs.
Assuming the partners mutually agree to dissolve the general partnership, the next step is to start winding up the business as outlined in the partnership agreement. If the partnership agreement is silent, however, New York Partnership Law controls the process and can guide the parties. For instance, where the partnership agreement does not address the payment of liabilities, absent a contrary agreement between the partners, New York Partnership Law establishes default distribution rules. Under N.Y. Partnership Law § 71, the liabilities of the partnership are ranked in order of payment, as follows: those owing to creditors other than partners; those owing to partners other than for capital and profits; those owing to partners in respect of capital; and those owing to partners in respect of profits.
The partnership law of New York also provides significant guidance on several topics concerning the wind-up of the partnership, including the effect of dissolution on the authority of a partner, the power of a partner to bind the partnership after dissolution, the effect of dissolution on liabilities, and the liability of persons continuing the business.
Like other entities, the process for winding up a partnership involves numerous tasks, including satisfying outstanding financial obligations and taxes; notifying employees, customers, and key business partners; liquidating partnership assets; and distributing any profits, among many others. Each partner must conduct themselves under the partnership agreement and/or New York's partnership law to avoid additional liabilities.
When Litigation Becomes Necessary
Where partners are unable to reach an agreement on the dissolution of the general partnership, a partner may seek a judicial resolution. Under New York's Partnership Law, a court may order dissolution upon application by a partner when:
- A partner has been declared incompetent in any judicial proceeding or is shown to be of unsound mind;
- A partner becomes in any other way incapable of performing his part of the partnership contract;
- A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;
- A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him;
- The business of the partnership can only be carried on at a loss; and,
- Other circumstances render a dissolution equitable.
The triggers to judicial dissolution identified above have a long history in the New York Courts, and their interpretation can often seem counterintuitive to a layperson. Making matters more arduous is the fact that many judicial dissolutions involve multiple types of allegations, including breaches of fiduciary duties and other misconduct, fraud, breaches of the partnership agreement, unprofitable business operations, accounting, and other equitable circumstances, such as deadlocks between partners.
The partnership dissolution process is often complex and emotionally charged. Given that each member has a vested financial interest in the outcome, it can also become contentious if the former partners don't see eye to eye. The best way to avoid disputes is to have a comprehensive partnership agreement in place that outlines the dissolution process. Where you don't have the benefit of a well-drafted agreement, Scarinci Hollenbeck's experienced business divorce attorneys can still help you navigate the process as smoothly as possible.
At Scarinci Hollenbeck, our Corporate, Partnerships & LLC Disputes Practice Group brings together years of experience in advising partners to minimize the emotional and financial strain that disputes and business separations can cause. Therefore, our attorneys are committed to pursuing outcomes that safeguard our client's interests while prioritizing efficient, cost-effective resolutions that address both the legal and personal dimensions of these situations. In case you missed part I of this article, click here to learn more.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
