A business partnership can break down for a number of reasons, but knowing what to do next, including your legal and financial obligations, is important. The termination of a partnership is referred to as a ‘dissolution’. If you’re looking to dissolve your business partnership, here’s everything you need to know, whether you have a partnership agreement or not.
Reasons to end a partnership
A business partnership can dissolve for a number of different reasons. Some of the most common reasons for ending a partnership include:
- The partnership term expires
- A partner wants to leave
- The partnership becomes illegal
- A partner dies
- A partner becomes bankrupt
- The business becomes insolvent
- The court dissolves the partnership due to an incapacity or unsoundness of mind in the partners
- The project for which the partnership was created ends
Whatever the reason for dissolving the partnership, the process for termination is dependant on whether there is a partnership agreement in place or not. If there is no agreement between the partners, the procedure for dissolution will be regulated by the Partnership Act of the state or territory in which the partnership was formed.
How to dissolve a partnership
If the term of the partnership has expired, the partnership will automatically end at that date. The same goes in situations where a partner has died, become bankrupt, or the partnership becomes illegal. If a partnership is to be dissolved due to unsoundness of mind in a partner, the other partners must apply for a court order to dissolve the partnership, which requires a formal declaration that the person is unsound of mind.
On the other hand, a partnership set up for an indefinite period of time grants partners the ability to resign at any time they wish so long as written notice is given. If a partner is choosing to leave a business, they must give written notice of their intention to all other partners, and specifying the date they wish to leave. The resignation of that partner triggers the dissolution.
Once the notice has been sent to all partners, it will be published in the Government Gazette and a local newspaper, alerting the broader public of the dissolution and protecting the partner from creditors who continue business with the other partners.
Terminating a partnership with an agreement
When forming a new business, if you created a formal contract governing the relationship between yourself and the other partners, then you have a partnership agreement. A partnership agreement outlines the terms according to which the partnership is carried out and will generally include details such as:
- The type of business
- The term of the partnership
- Management of accounts
- Selling of property
Therefore, if you have a partnership agreement, the terms relating to termination will help govern the procedure to be undertaken in order to dissolve the partnership. Of course, the dissolution of the partnership will still be subject to the legislation governing the state you formed the partnership in, for example, the Partnerships Act 1892 (NSW). It’s also ideal for you to seek legal advice to assist you through the dissolution process.
The legislation governing the dissolution of a partnership in each state and territory across Australia include:
- Partnership Act 1963 (ACT)
- Partnership Act 1892 (NSW)
- Partnership Act 1997 (NT)
- Partnership Act 1891 (QLD)
- Partnership Act 1891 (SA)
- Partnership Act 1891 (TAS)
- Partnership Act 1958 (VIC)
- Partnership Act 1895 (WA).
Terminating a partnership without an agreement
As mentioned previously, if there is no partnership agreement, or the contract is silent on the matter of termination, the governing law of the state or territory will apply. Take New South Wales for example, Division 4 of the Partnership Act 1892 (NSW) states that partners may dissolve a partnership:
- By the term of the agreement expiring; or
- If no specific term or date is included, then by one partner giving notice to the other of their intention to dissolve the partnership.
Notice must be given in writing, including the date from which they wish to terminate. If no date is specified, the partnership will dissolve immediately.
The consequences of dissolving a partnership
Even though the partnership is being dissolved, there may still be debts to take care of. Under section 9 of the Partnership Act 1982 (NSW), each partner is jointly liable for all business debts incurred while they were a partner of the business. You should also consider consulting with an accountant to ensure you have no outstanding tax liabilities.
Closing the company
If the dissolution of the partnership means that the business will end, the company will need to be deregistered with the Australian Securities and Investments Commission (ASIC). To deregister your company, the following criteria must be complied with:
- All company members agree to deregister
- Trading has ceased
- The assets of the company are worth less than $1,000
- There are no outstanding liabilities
- The company is not involved in legal proceedings
- There are no outstanding fees and penalties under the Corporations Act 2001
Before deregistering you will also need to ensure you have completed your final tax return, cancelled your GST registration and finalised your superannuation payments for your staff.