It’s common for partners to part ways after sometimes in a business partnership. Usually, the need for separation would arise if there are disagreements between the parties.
In most cases, the differences are caused by; changes in goals and objectives and incompatible working styles and decisions. For instance, when one feels that their partner undermines their choices.
Whichever the reasons for your differences, you must always understand and follow the appropriate guidelines for partnership termination. This post discusses some of the right ways through which partners can terminate their agreement. But before that, let’s find out more about the partnership agreement.
Understanding Partnership Agreement
A partnership agreement is a contract where two or more individuals join to start a business or firm. Joining together means each partner owns a certain percentage of the business’s assets and liabilities.
Also, the agreement covers the rights and responsibilities of every partner. Although it’s not a legal requirement that you must have, it’s wise for partners to sign one. Why’s that? The document may help reduce the potential of complications or conflicts in case of critical disagreements.
The contract should have:
The name of the partners- a good agreement should cover personal details of partners like their names and addresses, among others.
Business/entity name- partners may decide to create an official business name applicable for all their financials, accounts and documentation.
Percentage of ownership of every partner- it’s not a must that partners have equal contributions. But, it should record every donation made by each member plus their financial stakes. The document should also outline what happens if:
The partners decide to sell the business
Partners want to absorb new or more members
If a partner is bought out
How to divide profits- it should document the percentage under which the partners plan to divide or distribute profits. But, of course, partners would be considered equal if there were no allocations of profit distributions.
Conflict resolution- here, the agreement outlines the appropriate mechanism the partners should follow in conflicts or disagreements.
The decision-making- the document should outline the decision-making powers of every partner. For instance, which partner possesses the financial and daily management decisions. Or it should indicate if all the partners are responsible for making decisions like in group decisions.
Lastly, the partnership contract should include the critical development part. A place that lays down the procedures to amend or terminate the relationship, more so if a partner wants to retire or dies.
What Events Trigger Partnership Termination?
Apart from the personal differences between partners, the partnership may be terminated if it ceases to align with its primary startup reasons. Or when the business changes its legal structures, for example, moving from a partnership to sole proprietorship, limited liability company (LLC). Or when a partnership changes to a C Corporation.
All these would mean the business has to change its name and have a new board of directors. Therefore, it must abide by the new laws it changes to, like obtaining a new Federal Tax ID.
So in case, the partners have voted to terminate their relationship, they must pay taxes and any remaining profits and assets according to their percentage of contributions. However, suppose they decide to reconstruct or change the partnership. In that case, they should devote all the assets and liabilities to the new structure. After that, the partners should begin the dissolution process and then terminate their partnership agreement.
The process of partnership termination may come with several challenges. So make sure to have a contract before commencing a business partnership. You may download a free partnership agreement online from this website.