Facing Dissolution of your Partnership – What does this mean for you?
Dissolution in the context of any business is always an intimidating phrase, as it generally sounds the death knell for the business, whether intentional or not. However, whether your business is a general partnership or a limited liability partnership (LLP) the term dissolution will have very different meanings in practice.
A general partnership arises when 2 or more people enter into business together with a view to making a profit. A partnership arises automatically, whether the parties are aware of it or not. Dissolution in the context of a partnership does not necessarily result in the winding up of the business. Dissolution means that the partnership as it is currently constituted comes to an end. What happens after that depends very much on the circumstances. On the one hand the partnership will continue as before, using the same name, premises and client base, simply minus a retired or deceased partner. This scenario is known as a technical dissolution and the business continues as before.
On the other hand, it may be that the partnership does come to a complete end upon the dissolution of the business in that it is wound up. What this means in practice and in simple terms are that all assets are sold off, liabilities settled and anything remaining is divided amongst partners. How the winding up is to be dealt with will be the subject of agreement between partners. In absence of agreement, the winding up will be subject to the terms of the Partnership Act 1890. This situation is known as a general dissolution.
Certain events will automatically trigger the dissolution of a partnership and thus possible winding up of the business unless agreement clearly states otherwise. This includes the death or bankruptcy of a partner. Partners should also be aware that dissolution in either a technical or general sense does not put an end to liabilities incurred whilst you were a partner. Those liabilities will remain in an unlimited personal sense if the debt remains outstanding.
Whilst the name Limited Liability Partnership includes the term partnership, do not be fooled by the name. The concept of dissolution and winding up in the context of an LLP is very different. In fact, the insolvency procedure looks more like that of a company rather than a partnership, as the insolvency procedures applicable to companies are applicable to LLP’s as well. This is due to the fact that, unlike a partner, an LLP is a body corporate with separate legal personality.
Like companies, LLP’s can be made the subject of various insolvency processes including administration, compulsory liquidation and creditors voluntary liquidation. Unlike a partnership, the term dissolution of the LLP refers to the final stage in the winding up process rather than the beginning, when the LLP finally comes to an end.
Another difference between a partnership and an LLP is the fact that members of an LLP do not have unlimited personal liability on an LLP’s insolvency. Beware, however, of the Claw Back Provisions applicable to LLPS, which mean that two years before an LLP goes into liquidation, creditors have the power to claw back money drawn by members in circumstances where that member knew or ought to have known that the LLP was going into insolvent liquidation. This could leave an outgoing member vulnerable in the face of an impending insolvency.
Whatever business vehicle you find yourself in, and whatever the circumstances of your dissolution, without doubt it is always in the best interests of your business to have a written agreement in place to ensure all eventualities are covered. In the context of a general partnership this is particularly important in the event of the death, bankruptcy or retirement of a partner to ensure the partnership continues.
Dissolution of your business will always be a fraught time, but with careful planning, a clear written agreement and co-operation between partners and members, dissolution can be achieved with minimal difficulty.