Dissolving a partnership

A partnership is comparatively easy and inexpensive to set up and has minimal reporting requirements. A partnership tax return is lodged each year, with each partner paying tax on their share of the partnership’s income.

Generally, a partnership does not need to be registered.

In a limited partnership, each partner’s liability is limited to the amount of money they contribute to the partnership. Limited partners are usually passive investors and must not be involved in the day-to-day running of the business.

Many business partnerships use a partnership agreement to outline the duties, responsibilities and rights of each partner. Learn more about partnership duties and agreements here.

What are the advantages of a partnership?

There are a number of advantages of business partnerships, some of which include:

• collected capital available for the business;
• greater borrowing capacity;
• limited external regulation;
• partners’ business affairs remaining private; and
• a legal structure that can be varied easily if circumstances change.

However, the fact that each partner in a general partnership is “jointly and severally liable” for the partnership’s debts creates the potential for disputes.

Different types of partnerships

There are three types of business partnerships — general partnerships, limited partnerships and incorporated limited partnerships. Each type has its own features and requirements.

General partnership

A general partnership is suitable when two or more people want to run a business together and need a simple business structure. It does not need to be registered.

Limited partnership

A limited partnership is suitable when a business needs to raise capital, such as in real estate development, mining or film productions.

It must be registered and have at least one general partner and one limited partner. General partners take on the day-to-day management of the business and have an unlimited debt liability. Limited partners play no part in the business’s management and their debt liability is limited to the amount they contributed to the partnership.

Incorporated limited partnership

An incorporated limited partnership is suitable when a business wants to engage in venture capital projects, which are high risk but offer high returns. It is a complex arrangement which must be registered and have at least one general partner and one limited partner.

When would (or should) a business partnership end?

There are many situations in which a business partnership may be dissolved, including when:

• the term specified in the partnership agreement expires;
• a partner can no longer legally own a business;
• a court orders that the partnership be dissolved;
• a partner becomes bankrupt;
• a partner dies; or
• the business goes bankrupt.

By court order

A court can order the dissolution of a partnership when:

• a partner has been declared to be of permanently unsound mind;
• a partner becomes in any other way permanently incapable of performing their part of the agreement;
• a partner has engaged in conduct that prejudicially affects the carrying on of the business;
• a partner has wilfully or persistently breached the partnership agreement, or has otherwise conducted themselves in the business so that it is not reasonably practicable for the other partners to carry on the business in partnership with them;
• the business can only be carried on at a loss; or
• any other circumstances arise which render it just and equitable that the partnership be dissolved.

By partnership agreement

A partnership should have a partnership agreement that provides the specifics of how the partnership is to work. The partnership agreement may specify when the partnership is dissolved, such as when the partnership is:

• for a fixed time, and that term has expired;
• for a single project, which has been completed; or
• for an undefined time, and a partner has given notice that they intend to dissolve the partnership (as long as unanimous consent is not required).

By death, bankruptcy or illegality

Under the Act, every partnership is dissolved when a partner dies or goes bankrupt; or when an event occurs that makes it unlawful for the partnership business to continue operating or for the partners to continue operating it in partnership.

How do you end a business partnership?

A partnership agreement will usually specify the terms and conditions for dissolving the partnership, and how partnership property is to be distributed. If there is no partnership agreement, the process will be guided by the Act.

Deed of dissolution

It is prudent to document the dissolution of a partnership in a deed of dissolution. The deed specifies the terms of the dissolution, plans for the business, and how the partners can interact with each other and the business (if it remains) in the future.

A deed of dissolution commonly includes:

• the terms and price for a buyout of a partner;
• instructions for managing existing contracts and customers of the business;
• instructions for managing the intellectual property of the business; and
• restraint, non-compete and confidentiality clauses.

Things to consider before dissolving a partnership

The primary considerations when dissolving a partnership should be what will happen to the business and what each partner plans to do after dissolution.

If the business is to close, there will be administrative tasks including:

• filing final tax returns and Business Activity Statements;
• closing bank accounts;
• cancelling insurance policies;
• deregistering the business with the Australian Securities and Investments Commission;
• paying any outstanding debts; and
• paying employee entitlements.

If the business is to continue operating, it will need a new structure. If the business is converted to a company, it will need a new Australian Business Number (ABN) and new Tax File Number (TFN).

How Gibbs Wright can help

Dissolution of a partnership can be complex. If you’re involved in a partnership dispute or are considering dissolving a partnership, we recommend that you seek legal advice. Contact Gibbs Wright Litigation Lawyers for a free and confidential initial consultation to discuss your legal rights and obligations.