Why Do California Partnerships Dissolve?
The reality is that most Silicon Valley businesses do not last indefinitely. This is especially true of partnerships, which depend on the ongoing participation of the individual partners in the business. There are several reasons a partnership can dissolve, including but not limited to:
- The partnership agreement specified a date for winding down the business.
- A partner has died.
- One or more partners wish to leave the business.
- The rest of the partnership decides to remove a partner.
- The partners are no longer able to work together and disagree about key issues affecting the management of the business.
- The partnership decides to transition to another form of business entity, such as a limited liability company or stock corporation.
Ideally, the written partnership agreement will set forth specific provisions on how to trigger a dissolution and the necessary steps that the partners need to take. Indeed, the first thing any partnership needs to do if dissolution is under consideration is to review the partnership agreement with a partnership attorney. If there is no written agreement, however, California law still provides a process for accomplishing the dissolution.
Making Dissolution Go Smoothly
Keeping in mind that the partnership agreement, if any, will decide how to accomplish most of these steps, the basic process of dissolving a partnership on good terms is as follows:
- Taking a Vote: The partners must meet and take a vote to dissolve. The partnership agreement will specify the necessary threshold–e.g., a majority or unanimous vote. Otherwise, California law generally requires a majority vote.
- Negotiate a Separation Agreement: Even when there is a written partnership agreement in place, it is still generally good practice for the partners to also negotiate and sign a “separation agreement.” This is basically a contract covering the terms of winding down the business, including calculating each partner’s share and a timeline for shutting things down in an orderly fashion.
- Paying Debts and Distributing Assets: Closing a business means paying any outstanding debts to creditors. Generally, all debts must be paid before the partners can reclaim their initial capital contributions and their share of any remaining assets. The partnership must also generally notify all creditors, either directly in writing or by publishing a notice in a local newspaper.
- Filing the Paperwork: Unlike corporations and LLCs, general partnerships are not required to register with the State, as individual partners remain personally liable for the debts of the business. But many partnerships do file an optional Statement of Partnership Authority with the California Secretary of State. If the dissolving partnership filed such a Statement then it does need to file a separate Statement of Dissolution. The partnership may also need to file a final tax return with the California Franchise Tax Board.
Speak with a San Jose Partnerships Lawyer Today
Dissolving a partnership does not have to be a contentious or drawn-out process. But it does require observing certain legal formalities. If your partnership is looking to bring things to a peaceful conclusion, contact SLG today to schedule a consultation.