Best Way to End a Business Partnership - Make a Plan
Creating a Dissolution Plan Can Save Money and Hassle
Breakups are tough. And nowhere are they tougher than with business partnerships. It's like a divorce with additional complications. And most of those are financial. You may not be able to salvage the personal relationship, but you can save yourself some money and hassle as you end your business partnership.
You want this partnership breakup to go as smoothly as possible, for financial and personal reasons.
So, I suggest a two-step process.
First, consider your ultimate goal with this change, and second, consider making a plan — it's called a dissolution plan.
The suggestions in this article would apply to a partnership business entity or to an LLC with several members (owners), which is similar. If you are in a small corporation or S corporation with only a few owners, this article might apply to you too.
While I'm not an attorney, and I am not giving you legal advice, I can point out some issues that need to be discussed and decided on when you end a partnership. These are questions you and your partners should discuss and get some agreement on, but the formal legal matters will need to be done with the help of an attorney.
Before you decide to close the doors...
Dissolution — closing the doors of a business — should always be the last resort. Before you make a final decision to end the partnership, consider these questions:
Do you have a partnership agreement?
When you started the partnership, I hope you created a written partnership agreement, prepared by a competent attorney, that includes specifics about how to end the partnership or how to continue with changes to the status of one or more partners.
Having a partnership agreement in place makes changes easier, and you may decide it's worth it to continue.
Without an agreement, closing will take longer and be more expensive.
If there is no partnership agreement, the partners will need to be able to work together to find common agreement. Having a difficult partner may be the reason you are dissolving the partnership, but you'll have to find a way to get through it. (Sounds like a divorce, doesn't it?)
You might want to consider mediation in this situation, before you resort to costly litigation.
What is the partnership type? What type of partner is the person leaving?
The type of partnership and the status of the partner who is leaving can make all the difference in what happens to the partnership and if it can survive. If the partner has a majority controlling share, the partnership may not be able to survive unless the other partners can do a buyout.
Can the partnership continue?
If one partner is leaving the business, you might be able to continue by buying out that individual. That assumes you want to continue with other partners.
If only one partner remains and wants to continue the business, check with an attorney about how to change the legal status of the business.
Can the business be sold?
Selling the partnership might be another alternative to closing.
The partner (or partners) leaving the business will probably have to be bought out of their share of the business before the sale.
What is your ultimate personal goal for yourself and the partnership?
Consider your personal situation and whether the partnership is what you want after the other person leaves.
Creating a dissolution plan
If you have finally decided to end the partnership, and even if you have a partnership agreement, you will need a plan for the process of dissolution. The SBA says a dissolution plan should begin with a review of the state of your business.
What to include in your dissolution plan
A timeline for what will happen when, and up through the formal dissolution and final tax return.
Tasks that must be performed during the process. Don't forget to include an independent valuation of the business.
Payments that need to be made and who must make them. This includes attorneys, state and federal taxing agencies.
Documents that need to be filed, including final tax return, state entity documents.
Plans for notification of all stakeholders, including employees, contractors, vendors, and, of course, customers. As is the case with all major business changes, it's important to preserve the goodwill of the business (even if it's being dissolved). Add these decisions to your dissolution plan. Susan Heathfied, Human Resources expert, has a checklist for employment termination that might help you remember everything.
Yes, ending a business is like ending a marriage, but it can go more smoothly if you decide on the ultimate goal at the beginning of the process and you use a detailed plan to get to your end result.