Partnership Dissolution

54and56

I'm wondering what the situation is if two people start a business together as 50:50 partners and after a number of years one partner decides they want a new challenge and move to another country to pursue a completely different lifestyle whilst the other partner carries on the business as a sole trader.

Is the partner who remains behind obliged to "buy out" the departing partner if they don't have a formal partnership agreement in place?

What happens if the remaining partner can't afford to buy out the departing partner or simply doesn't want to increase the investment they already have in the business?

I assume the departing partner could in theory sell his 50% ownership of the business to someone else but even if they could do that would the remaining partner be obliged to accept whoever it is that wants to buy the departing partners 50%?

I've a family member (in law) who is thinking of getting into a 50:50 partnership with their "best friend" and doesn't seem to want to go to the trouble or cost of putting a formal partnership agreement together to deal with a breakdown of the relationship or when one party wants to exit regardless of how unlikely that appears possible to them right now.

pedroeibar1

The best advice to give your family member is to "Go talk to a lawyer".

'Partnerships' are totally misunderstood by many and by most of the newbies who post here. For starters, unlike a shareholding in a limited company, a partner cannot transfer his/her “share” in a partnership, so talk of “selling” or “buying” is impossible.

Go get legal advice, it will save a fortune in the long run

54and56

^^^ Hi Pedroeibar1,

That's EXACTLY what I'm advising my Sis in Law to do but she seems totally oblivious to the complications which regularly occur when partners split up in a confrontational manner.

Because she is refusing to invest in having a lawyer draft a Partnership agreement I wanted to start this thread to get a feel for what the law/experience is when partnerships don't work out so I can provide her with some motivation to put the right structures in place BEFORE they start up their business together.

pedroeibar1

Si vous êtes Jean, il faut que vous fassiez un effort avec votre belle-sœur et qu’elle parle avec un avocat. Point ! Lecture... (the bit on partnerships is at the end.)

54and56

pedroeibar1 wrote: »

Si vous êtes Jean, il faut que vous fassiez un effort avec votre belle-sœur et qu’elle parle avec un avocat. Point ! Lecture... (the bit on partnerships is at the end.)

Merci Pedro, I will review that info carefully. I know she is making a mistake to blindly start a partnership without putting the right structure in place but right now I'm seen as the negative Nelly because both prospective partners can't imagine circumstances arising where they would fall out!!

I hate being the one advocating a dose of reality but someone has to and hopefully in the end they'll both appreciate it if I can get them to sign a formal partnership agreement.

pedronomix

A partnership without a partnership agreement in place is like giving your worst enemy power of attorney to legally bind you to anything they come up with. If they won't go the legal route, there are tons of sample agreemets online that will deal with at least the basics.

Blizzard

You’ve given your sister in law sound advice. A written partnership agreement is a must have if you are going into business with ANYONE - most especially family and friends.

I am currently involved in a similar situation and never had one in place--hindsight is a great thing! After seeking legal advice, I was advised that if you do not have a partnership agreement in place, then the Partnership Act 1890 will govern relations with your partner. "Unlike a company a partnership is not a separate legal identity which means that partners have unlimited liability, unlike directors or shareholders in companies. And partnerships do not have to go through any registration process to be formed.
The downside then is that each partner is liable for the losses of his co-partner in carrying on the partnership business, even where the other partner has defrauded clients of the business. Without a written partnership agreement, the 1890 Partnership Act will mean that:

- there is not right to expel a partner
- any partner may dissolve the partnership at any time
- if a partner dies, the business will automatically dissolve
- there is no power to resign under the Partnership act, although a partner can retire by dissolving the Partnership.

It goes on to say - ‘If a partner, without the consent of the other partners, carries on any business of the same nature as, and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business.’

Simply put, I think, it really boils down to a case of two options either 1) the remaining partner has the option to buy out the departing partner or 2) the business is dissolved with any assets sold and split with the same thing happening to any outstanding debt. If the remaining partner cannot afford to buy out the partner, the business would dissolve. Normally buy outs are something that are re-couped after 2/3 years and seen as an investment so either the remaining partner wants the business or not. And you're right, I don't believe you can just sell a half of the business to just anyone - it would either need to be sold as a whole or dissolved. In an ideal situation it would appear that the remaining partner would buy out the departing partner, then your sister in law could buy in to the business with a partnership agreement in place from Day 1. I'm not an expert and think you'd definitely need to seek professional legal advice for her specific situation. I hope it all works out for her.

54and56

^^ Thanks Blizzard, really appreciate that.