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You are in business with one or more people, and everything seems fine until one of the partners decides to leave the partnership. This may be because your partner has decided to retire, or it could be over a dispute in compensation or the direction of the business. Whatever the reason, if you have not properly planned for this event, you could be looking at a Partnership Dissolution. This is because, in Texas, most partnerships will have to be dissolved if one or more partners decide to leave.

To protect your business from this happening, you need to plan ahead by working with a Partnership Agreement Attorney. Making sure you have a partnership agreement signed by all of the partners that provide for all contingencies can prevent you from being caught short in this situation.

What are the legal and financial ramifications of the departure of a partner?

Each person in a partnership shares a portion of the assets and liabilities of the business. This is the case whether you are running the business under a business entity like a limited liability company (LLC), limited liability partnership (LLP), or just doing business as a general partnership. So, when the partner informs you and the other partners that he or she is planning to leave if you do not have the proper language in your partnership agreement, you could be facing dissolution of the partnership business.

What is Dissolution?

Dissolution means a winding up of the affairs of the partnership. All assets are liquidated or distributed to the partners after the liabilities and other debts of the partnership are satisfied. This can cause a problem if you and the remaining partners want to continue in the business.

It can also be difficult if it turns out that the liabilities of the partnership are greater than the assets, requiring you and the other partners (including the one who is departing) to come up with additional capital to pay off these debts. Fortunately, there are a number of ways you can avoid this.

Planning Ahead to Avoid a Dissolution Event

Unless you set up the partnership for a limited purpose, such as developing a piece of real estate for sale, chances are that you don’t want to dissolve the business because one of your partners decided to leave. This is why it is important to have contingency provisions included in your partnership agreement. One of the most important is how to handle the departure of a partner.

In general, a departing partner is going to want to have his or her equity interest in the partnership bought out at the time of departure. This can be done by either having the partnership itself or one or more of the partners fund the buyout. If the business funds the buyout, the remaining partners will own a greater share of the company, although its assets will be less. In this case, they will have a larger share of a shrinking pie. On the other hand, if another partner buys out the departing partner’s share, this person will increase his or her share of the partnership. 

Understanding Valuation

The easy part is figuring out the mechanics of the buyout, but the hard part is the valuation. This is why many partnership agreements require that the partnership hire a professional appraiser to determine the value of the partnership, as well as the share being bought out from the departing partner. This provision should be clearly stated in the partnership agreement.

Another issue may arise if the buyout amount is greater than the partnership or any of the remaining partners can afford. In this situation, a provision should be added allowing either the buyout to be paid out over a period of time or for the partnership to finance the buyout with a loan from a third party. 

As with any transition, it takes a great deal of patience to make the changes smoothly. The key is to try to keep the relationship with the departing partner as amicable as possible. You also need to make sure that the departure doesn’t affect the business relationship with its:

  • customers,
  • clients,
  • and vendors.

The worst thing that can happen is to have the partnership dispute damage the business.

What happens if the departing party is unhappy with the terms of a buyout?

Many times, a partner will leave a partnership under duress. This person is unhappy either with the direction of the partnership or the specific relationship with one or more of the other partners. It is not uncommon for this to lead to litigation, even if there is a buyout provision contained in the partnership agreement. As you may be aware, business litigation can be a very expensive, time-consuming, and burdensome proposition.

The way to handle this is to add a binding arbitration clause to the partnership agreement. This can help reduce the cost and length of time involved in partnership litigation. Some of these provide for a single arbitrator chosen by both sides, while others allow for an arbitration panel where the partnership chooses one arbitrator, the departing partner the second, and the two arbitrators choose a third one who is often the most neutral of the three.

Another way to reduce the chances of litigation is to provide that the prevailing party has its legal costs and expenses paid for by the losing party. When this happens, both sides will have a vested interest in trying to reach an amicable solution since they could have to pick up the cost for the other side’s lawyers. It also reduces the chances of frivolous or vexatious litigation.

If you are in a partnership dispute, call Cole to help you make the transition smoothly.

Partnership disputes can often be some of the most difficult business matters to deal with. You have to continue to run the business while dealing with the departure of a former partner. If you are in this situation, The Cole Firm can assist you in navigating these treacherous waters and coming out on the other side with an amicable resolution of your partnership dispute with your business intact.

About the Author
Ryan G. Cole is a seasoned legal professional and the driving force behind Ryan G. Cole Law, PLLC, a boutique firm specializing in commercial litigation and construction law. Based in McKinney, Texas, his practice extends across the Dallas-Fort Worth area and northern Texas, where he offers experience in areas such as business and construction disputes, contract and agreement matters, intellectual property, transactions, arbitration, and litigation. With a wealth of experience in both prosecuting and defending commercial litigation cases, Ryan has successfully navigated numerous legal battles, including arbitration cases and proceedings in state and federal courts in Texas and Oklahoma. A keen listener, he prioritizes understanding his clients' concerns and works diligently to reduce risk and bolster businesses by proactively addressing legal issues. Ryan G. Cole is dedicated to crafting tailored strategies that align with each client's needs and objectives. He is committed to providing astute legal counsel and skillful representation, with a strong focus on cost-effectiveness and personalized attention, ensuring the best possible outcomes for his clients.