A Brief Description About the Partnership Dissolution Agreement
Partnership Dissolution Agreement When the partners of a firm or business wish to end the partnership due to some reason, then the partnership dissolution agreement is used so that any kind of misunderstanding or conflicts can be mitigated while settling the obligations (Li & Wolfstetter, 2009). This agreement also includes the plan to distribute the assets of the business among the existing partners. The partnership will only end when all the partners agree to terminate the joint business (Khoroshilov, 2017). Signing the partnership dissolution agreement will not lead to termination of partnership immediately, but the partnership will continue until the business debts are cleared, the legal existence of the business terminated, and the assets of the business or the partnership are distributed among the partners. This agreement is especially quite helpful if the partnership didn’t have an original partnership agreement or when the partnership agreement does not provide details for terminating the partnership.
Who Takes the Partnership Dissolution Agreement – People Involved
The people who agree to work together for a common goal and get into a partnership are known as partners of the company. When these partners agree to terminate the business or the company, then the partnership dissolution agreement is used. So, the people involved in this agreement are the existing partners of the business.
Purpose of the Partnership Dissolution Agreement – Why Do You Need It
The purpose of the partnership dissolution agreement is to implement the partnership termination while also making sure that the obligations of the partners are efficiently discharged. Once the partners agree to dissolve the partnership, or due to certain events like death, retirement, the bankruptcy of one of the partners, termination triggers, then the dissolution statement should be immediately filed. The partnership dissolution agreement declares that the partnership is no longer in the company or the business and that it needs to shut down (Khoroshilov, 2017). This agreement limits the liability of the existing partners for any action from the termination up to the time of complete dissolution and is then filed with the Secretary of State for the country where the business of the firm is located. The partnership dissolution agreement provides the complete process of winding up the firm’s residual business and also includes accounting for the assets & liabilities related to the business. Further, it determines how the assets and liability will be shared among the partners. It depends on the type of partnership whether the partners agree to share the assets and liability equally, or they will share in a specific percentage (Li & Wolfstetter, 2009). In both cases, once the agreement is signed, none of the partners will have exclusive possession to use the property until the business has been completely dissolved.
Contents of the Partnership Dissolution Agreement – Inclusions
If the partners wish to terminate their business partnership and want to make an agreement in relation to the process of termination of doing business, then the partnership dissolution agreement document will be used. This process also includes the reasons as to why the partnership is being terminated. But for all the situations, some common elements are included, which are as follows: –
- Purpose of partnership – A brief description of the reason why the partnership was formed, its history, the business details, product and services involved, and the size of the company.
- Information related to the partners – Along with the legal names of the partners, their contact details, address, their role in the business, all needs to be mentioned on the agreement.
- Dissolution Plan – The process of how the partnership will be dissolved and when will me mentioned. The date the partnership will stop working or doing business along with the details of the paperwork that will be required and submitted to the associate state agency (Khoroshilov, 2017). For instance, the certificate of cancellation, also known as the statement of dissolution with the government agency with which the business was registered initially.
- Liquidation – Details related to how the assets of the business will be handled and liquidates like it will include the selection of partners for gathering, selling, and distribution of the business assets, the appointment of an accountant to make the account statement (Crum, 1981).
- Assets Division – A brief outline of the division of assets and distribution of the remaining assets among the partners of the firm.
The content of the partnership dissolution agreement depends upon the nature of dissolution.
How to Draft the Partnership Dissolution Agreement
- Section 1 – Introduction to the parties – Partners name, business name, or the company name along with the registration’s details, should be there. For instance, sellers permit business license, that has been issued and needs to be canceled.
- Section 2 -Recitals – Key background information about the parties, the purpose as to why the partnership was formed and the reason as to what the partnership is being dissolved needs to be provided, and the total amount of capital contributions made by both the parties (Li & Wolfstetter, 2009).
- Section 3 – Dissolution – This part will name the state in which the business was established, along with the name of the partnership.
- Section 4 -Winding up – This section provides the details about the distribution of assets and liabilities as per their partnership type of agreed percentage. The essential part that the partners will no longer be responsible for each other’s debts and obligations.
- Section 5 -Custodian of partnership – Agreement should contain provisions that dissolve the partnership. It may also indicate that the partners should continue to perform and clear off their debts even if their partnership is dissolved (Bromberg, 1964).
- Section 6 – Identification – This states that all the partners have agreed and accepted the distribution of assets and liability.
- Section 7 – Amendments – This part indicates that any changes made to the agreement should be written and should be signed by every partner.
Negotiation a termination agreement will allow the parties involved to wrap up their obligations and firms’ assets economically. In such cases, things like scheduling outstanding payments, setting up a timeline for the leftover performance, to ensure the transferring of intellectual property.
Benefits & Drawbacks of the Partnership Dissolution Agreement
- The process allows the partners to follow and terminate the business.
- Clearly defines the role of the partners during the dissolution of the business.
- Answers various questions like when the business should dissolve along with the details of how the property should be divided among the existing partners.
- Another benefit is liability protection, which can help to avoid the potential cost and time-consuming litigation between the parties involved.
- It allows the partners to settle and wind up their own affairs instead of using the default state statutory terms (Li & Wolfstetter, 2009).
- Since the partnership dissolution agreement is legally enforceable, the partners can enforce the terms that ate mentioned in the dissolution agreement in court.
- This agreement later serves as a piece of evidence that the partner agreed to terminate the partnership as well as the obligation.
- One major drawback of partnership dissolution agreement is that these involve a lot of time, energy, and cost for both parties.
- It’s not possible to cover all the legal bases of both the parties, which again may lead to delay or confusion.
- Such agreements restrict the ability to operate the documents. For instance, is there is some change in the asset or liability distribution ratio, then it becomes quite difficult to make changes to the document. Thus, there is minimal flexibility.
What Happens in Case of Violation
The legal term for violating the contract is a breach of contract, which occurs when one party fails to fulfill the promise made by them according to the provision of the agreement. Partnership dissolution agreement is violated when there is a common dispute among the partners in relation to the termination process. This means that when one or more partners disagree with the decision to dissolve the partnership (Agastya & Birulin, 2018). In such cases, the details mentioned on the partnership agreement will be consulted, which should clearly state the procedure for conflict and termination. The conflict can be related to the issue of property distribution or liability. Some of the common defense against breach of contract include fraud, which means hiding the fact or intentional misunderstanding, duress means when the person is threatened to sign the contract, and mistake means when the person signed the contract by mistake (Li & Wolfstetter, 2009). Remedies for such defense can be in the form of financial compensation provided to the party.
The change in business climate or the goals of the partners involved in a joint business may indicate that its time to dissolve the partnership and release the parties involved along with their obligations. For instance, if a partner dies or enters bankruptcy, then the partnership gets dissolved automatically. But otherwise, when the partners involved agree to terminate the partnership, then by mutual content, they terminate it (de Frutos & Kittsteiner, 2008). Whatever be the reason for partnership dissolution, the partnership dissolution agreement will always be used. A well-drafted agreement can terminate the parties, which helps to prevent conflicts and misunderstandings in the future.