When a partner in a partnership business leaves the organization, it does not necessarily lead to dissolution and winding up of all partnership affairs. Rather than terminating the business, the remaining partners may choose to purchase the exiting partner’s interest in the business for a buyout price and continue business operations.
Dissolution of Partnership
Whenever one partner ceases to remain affiliated with the business as a partner -- either voluntarily or involuntarily -- the relationship among partners changes. This departure may lead to dissolution of the partnership, depending on partnership agreement terms or an agreement by the partners to dissolve the business. Dissolution may also result from a court judgment or be dictated by state laws. Once a partnership is dissolved, the business must undergo liquidation; complete any unfinished business, such as canceling contracts or paying debts; distribute the remaining assets; and terminate the business.
Reasons for Separation
A partner may voluntarily withdraw from the business or may be expelled involuntarily by the other partners. Death is also a form of partner separation. Once a partner leaves the business, he relinquishes his authority to perform acts on behalf of the business. For any wrongful separation, the exiting partner is liable to the business for any resulting damages. Wrongful dissociation can occur when a partner withdraws from the business in breach of the partnership agreement or any act that violates his fiduciary duties to the partnership. A partner may also be discharged from the business by court decree.
If the remaining partners in the business choose to purchase the dissociated partner’s interest, a financial accounting of the partner’s interest in the business must be done. This process involves assigning a cash value to the partner’s capital contributions and the partner’s percentage of liability for partnership debts. Each partner’s capital account includes the initial investment in the business, subsequent investments, cash withdrawals and share of profits and losses. The amount of the buyout price would be equal to the amount of the dissociated partner’s distribution and share of assets if the partnership assets were liquidated. Hence, the winding up process would involve the tallying and sale of assets in addition to paying off partnership debts. After all third-party debts are paid, the partners would receive a return of their capital contributions and a percentage amount of the remaining assets.
If a partner wrongfully dissociates from the business, the amount of damages will offset the buyout price. For instance, once the partners determine the dissociated partner’s portion of the distribution of assets, the amount of damages from a wrongful dissociation will be subtracted from the buyout price.
Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.