When a general partnership closes its doors for business, it must liquidate the partnership. Liquidation is a process of selling the business's assets, paying outstanding debts and dividing the remaining assets among the partners. In most states, a general partnership is formed whenever two or more individuals decide to carry on a business. There are no filing requirements for registering a partnership. Unlike a limited liability partnership, owners of a general partnership remain personally liable for the business's debts. Despite the informality of the business entity, partnerships should carefully follow the steps for dissolution to ensure the partners are not personally liable for any remaining debts or taxes.
Review the partnership agreement. If there is one in place, the partnership agreement may provide when and how the partnership will be dissolved, and how the income will be distributed among the members. It will be the guiding document throughout the liquidation process.
File dissolution documents with the state. If your partnership was doing business under a fictitious business name, file to cancel the business name. Some states may not require general partnerships to file dissolution documents, but you may still do so to put creditors and the government on notice of your dissolution. The specific forms and filing fees will vary by state.
Cancel licenses and permits. Contact the departments where the partnership acquired any permits or professional licenses, such as the department of health or agriculture. Canceling licenses and permits will protect your finances and your professional reputation.
Pay final paychecks to employees and issue final wage withholding documents. Ensure that paychecks are submitted to employees before or soon after their last day of work, in compliance with your state's laws. Issue form W-2 to each employee to report wages withheld.
Settle remaining debts. Notify all creditors and lenders of your intent to dissolve the partnership. If the partnership does not have enough money to pay the debts, first sell the partnership's assets to generate income. If after selling assets, the partnership still has debt, the partners are personally liable for the debt. This means the debt will be divided among the partners pursuant to the partnership agreement, and each partner is personally responsible for paying their portion.
Sell any remaining partnership assets and distribute income to partners. How the income is divided will be determined by the partnership agreement. If there is not an agreement in place, distribute the income evenly among the partners.
File state and federal income tax returns. The state tax return will differ depending on which state your business is located in. File Form 1065 with the IRS to report partnership income, and distribute Schedule K-1 to each partner, listing their share of the income.
Close all partnership business accounts and credit cards.
Maintain business records. The state or the IRS may request financial, tax or employment records. Keep the records in a safe place for three to seven years after dissolution.
- Allan Danahar/Digital Vision/Getty Images