Can a Partner Withdraw From a Business Without Dissolving It?
Sept. 16, 2022
A partnership is a business structure in which two or more persons or entities establish a working relationship to operate their business for profit. Under California law, a general partnership can be formed by handshake or through the creation of a written partnership agreement. Either way, the partners can choose whether or not to register the entity with the Secretary of State.
A general partnership that is formed without a written partnership agreement leaves the partners liable jointly and severally for all obligations of the partnership. This means that if one partner runs up debts and disappears, the other partners are responsible for paying off that debt. Profits are taxed as the personal income of the partners. A written partnership agreement, on the other hand, can address how profits will be shared, how obligations will be taken on and paid, how partners can withdraw or be expelled, and how a partner can sell of transfer their interest in the partnership.
In the years before 1997 when California adopted the Revised Uniform Partnership Act (RUPA), if a partner decided to leave for whatever reason, or died or was expelled, the partnership ended since it was viewed as an aggregate of the partners. Under RUPA, a partnership is now viewed as a separate entity, and even if one partner leaves, the entity remains.
Even with RUPA’s provision for the continuation of the partnership, a partner who is leaving poses several questions and issues for the other partners. How do you buy out that partner’s interest? Who assumes the operational and managerial duties, if any, of that partner? If the partner wants to sell to a third party the partners find a bad fit, what can they do?
If you’re involved in a partnership in or around Irvine, California, and one partner’s sudden decision to leave has thrown things into turmoil, contact William B. Hanley, Attorney at Law. Likewise, if you’re a partner seeking to withdraw who is meeting opposition, reach out immediately.
With Attorney William B. Hanley’s 40 years of business litigation experience, he will help you resolve the situation and move your business forward. He represents clients throughout the state of California, including the counties of Los Angeles, Orange, and San Diego.
for a Partnership Dissolution
The departure of one partner doesn’t necessarily end the partnership itself. It can continue if the other partners agree on that course.
Partners, of course, can withdraw for a variety of reasons. They may simply wish to retire, or they may be facing health issues or have a family member who may need care because of a medical condition. Partners may also simply decide it’s time to move on to a new pursuit. And, of course, the unexpected can happen, and one partner passes away.
As for the dissolution of a partnership, that can also arise from a variety of issues. The business itself may be unprofitable, or it may face competitive challenges from new entities entering their field of specialty. Debts can be overwhelming, or the partners may have a hard time obtaining financing to keep operating the business.
Employees can be another source for the decision to dissolve. Perhaps the employees are not performing to expectations, or they have decided to pose legal or regulatory challenges because of working and pay conditions.
California Law on Partnerships & the Revised Uniform Partnership Act (RUPA)
Partnership law is found in the California Corporation Code. The code says: "’Partnership means an association of two or more persons to carry on as coowners a business for profit formed under Section 16202….”
The Code originally adopted the Uniform Partnership Act (UPA) in 1994, and then in 1997 embraced the Revised Uniform Partnership Act (RUPA), which is considered the new official version of the original UPA.
RUPA is the instrument allowing partnerships to avoid dissolution if one partner withdraws or is expelled. RUPA looks upon partnerships as entities existing outside of the aggregate of the partners involved. Prior to RUPA, a partnership could continue for 90 days after a partner left, and that was it. RUPA still recognizes the 90 days but allows remaining partners to choose to continue operations.
The Partnership Agreement
A general partnership can be formed with a handshake and an oral agreement among the partners, but this leaves the partnership under several obligations under RUPA. One such obligation is that the partners are separately and jointly responsible for all debts and their repayment. Another is that each partner has an equal right to control the business and make decisions regarding the business. With this sort of arrangement, disputes can easily arise, and the business can devolve into endless arguments and disagreements.
With a written partnership agreement, however, the duties of each partner can be spelled out and provisions included to deal with the assumption of debt and its repayment. The provision could provide for a majority vote, for instance, for any debt decision.
The agreement can also address the departure of a partner and how that partner will be compensated for their contributions. Under RUPA, everything would have to be split equally, but an agreement can spell out methods of valuation and recompense. The agreement can also set guidelines for the sale of one partner’s share of the business, again with a valuation mechanism specified and in place.
In short, having a mutually agreed-upon partnership agreement can help prevent disputes and provide protections for the partners against the actions – or inactions – of one partner.
Experienced Help When You Need It Most
With or without a partnership agreement, a general partnership can find itself at loggerheads if one partner suddenly decides it’s time to move on. The value of a partnership agreement, of course, is that standards and procedures have been established, whereas with an oral agreement, there’s no record of who agreed to what.
If your partnership is facing a departure that threatens the survival of the business, or if you decide it’s time to move on, you should seek the guidance of an experienced and knowledgeable business litigation attorney. With a 40-year track record, Attorney William B. Hanley can help you address and resolve your situation, even if it means going to court.
Before your partnership falls into disarray or dissolution because of a departing partner or other issues, contact William B. Hanley, Attorney at Law. Attorney Hanley proudly serves business clients in and around Irvine, California, and throughout the counties of Orange, San Diego, and Los Angeles.