Dissolving a partnership – When owners want a divorce

28th October 2020

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There are many reasons why businesses and partnerships dissolve or split up. But whatever the reason, how a business deals with that break-up depends on what type of business it is – whether it is a partnership or a limited company. In this article, we will look at both scenarios and address why it happens, and what happens next. Breaking up is never an easy thing to do, especially when two partners have invested a great deal of time, money and effort into making a business work. Just like a personal relationship between two people, there can be tears, hardships and arguments. But, ultimately, if it’s the right thing to do, then the right course of action must be taken. When the decision to split has been made, working towards a suitable outcome for both parties will be at the top of the agenda. This is especially true of a business partnership, where both parties will want to leave amicably, with the least pain as possible, and ensuring they are set up for future life without their ‘better half’.

What are the common reasons for business partnerships dissolving?

There are many reasons why a business partnership dissolves. Here are some of the most common:
  • You’ve simply reached the end of the line. You’re tired or bored of each other, and you need a change
  • Too many disagreements. One of you wants to do things in a certain way, while the other wants to operate in completely the opposite direction. Often, the working relationship then becomes untenable
  • One of the partners has had enough of running a business. The stress and pressure has become too much and they just want out
  • In a partnership, you have to work to each other’s strengths. But when that doesn’t happen, you can find both stepping on each other’s toes or interfering, or one taking on too much while the other doesn’t take enough on, leading to resentment a breakdown in the relationship
  • Your ideas are different, sometimes even poles apart. If one wants to focus on a certain aspect but the other disagrees, then disputes are again likely to occur
  • If one partner dies, the other may not wish to go it alone
  • You’re not making enough money and one of you says “Is it all worth it?” If that’s what they’re thinking, their heart may no longer be in and, sadly, the end is probably nigh
  • You become tired of the commitment – long hours, working weekends, little “you” time. Again, this can prove ultimately fatal to a partnership

You’ve made the decision to split, but where do you go now?

You want to dissolve the business as amicably as possible. There will be much talking, soul-searching, numbers to be crunched and possibly confrontation. But first things first, you have to look at your partnership agreement or shareholders agreement.

Do you have an agreement in place?

When two or more individuals set up a business together, they would have hopefully put an agreement in place when they started trading that covers the event of the partnership dissolving. A partnership is legally defined by the Partnership Act 1890 and is the format commonly chosen to set up a business that will be owned by two or more individuals, and it does not have to be registered with Companies House. Although business partners go into it with the very best of intentions, it’s prudent to have such an agreement set out, either written or orally, to outline the circumstances in which they want the partnership dissolved. After all, they will share all the risks, costs and responsibilities, as well as the profits. So, when a dissolution becomes reality, the partnership agreement should set out how assets and liabilities are to be divided, and how trading is to be wound up when the business ceases. If an agreement has not been signed, all the profits of the partnership are shared equally and each partner must register with HMRC for self-assessment. They must also take responsibility for paying National Insurance contributions and income tax on their share of the profits. A good partnership agreement will outline all the fine print to amicably end that partnership, and will also set out a disputes resolution process, which could help save any arguments or disputes if followed. Essentially, if one partner wishes to leave the partnership, they should be able to do so with as little fuss as possible. A partnership will, however, be automatically cancelled, under HMRC rules, should one partner die or be made bankrupt.

Parting ways with no partnership agreement

If, in the unfortunate event there is no partnership agreement, then the first course of action is to immediately cease trading under the current business name. If there is no partnership agreement, or if partnership agreement doesn’t set out a plan for dissolution, then the Partnership Act 1890 will come into force. Under the Act, the default position is that, without an agreement to the contrary, any one of the partners may issue notice dissolving the partnership and no minimum notice period is required. A partnership will automatically be dissolved, according to the Act, should any of the following occur:
  • One of the partner dies or becomes bankrupt
  • The partnership is ordered to dissolve by the court
  • It is illegal to continue the business of the partnership
  • The partnership was formed for a pre-agreed fixed term and that term has now come to an end
  • The partnership was formed to carry out a specific objective, and the project is now complete
  • A partner gives notice to dissolve the partnership to the other partners. The notice, which does not need to be in writing, does not need to outline a reason and it can have immediate effect
The Act also sets out what steps should be taken with regards to the distribution of assets and liabilities on dissolution, which include the following:
  • All debts and liabilities of the partnership must be paid
  • Payment of advances made by partners to the partnership must then be repaid
  • Any capital due to the partners is paid
  • After these have been paid, anything left is divided between the partners according to percentage of profits they are due
Crucially, if there is no partnership agreement in place, the Act also provides no form of restrictive covenant on any partner who decides to leave. That means, in a nutshell, that all losses must be dealt with and that there is nothing to stop the outgoing partner from taking clients with them or setting up shop in direct competition to you on the opposite side of the street. You will have to decide whether you want to buy out your former partner or stop the business from trading altogether. Whichever decision you make, it would be advisable to sign a confidentially agreement with your former partner that will prevent any such issues from arising the future, paving the way for each of you to go your separate ways without unnecessary hassle and conflict.

Dissolving a limited company

When you close a limited company, its owners will hopefully have entered a shareholders’ agreement that will tell them how to deal with the shares on a closure, or split, or death of one shareholder. If they haven’t, then it may fall to the legal experts to help the “divorce” be decided in a fair way. A limited company’s members must apply to the registrar at Companies House for that business to be struck off the register and dissolved, and it must be signed by a majority of the company’s owners or shareholders. Any of the assets of the company should be dealt with before applying, for example closing any bank accounts, as if you do not then when the company is dissolved, all the remaining assets will pass to the Crown (including any bank balances). It costs £10 to strike off a company. There are some circumstances in which a limited company cannot be struck off and dissolved, such as if it has money due to HMRC, or if it is the subject of insolvency proceedings or a compromise agreement with creditors.

Can you pay the bills?

The way you close a limited company depends if it can pay its bills or not. If the company is solvent – it can pay its bills – then you either apply to get the company struck off the Register of Companies or start a members’ voluntary liquidation. Striking off the company is usually the cheapest way to close it. However, if the company is insolvent – it can’t pay its bills – then the interests of the people your company owes money to legally come before those of the directors or shareholders. In that event, you must use the creditors’ voluntary liquidation process – and your company might be forced into compulsory liquidation if you do not pay creditors.

Dissolving without a shareholder agreement

You must be aware that if you do not have a shareholder agreement and you want to dissolve the business and relationship, you are open to shareholders taking clients with them, or setting up shop next door in direct competition to you.

Do you need further help or advice on dissolving a partnership or company?

As with many relationships, splitting up a business partnership can be a torrid, messy and unsavory affair. But it doesn’t have to be. If it’s dealt with smoothly and correctly, it can be a relatively pain-free exercise and all parties can move on and enjoy a happier future. RDG Accounting is here to lend a hand and help steer you in the right direction, and make sure your house is in complete order so you can experience a ‘happy ending’. We have helped other businesses and individuals when they have chosen to dissolve a partnership or company, and we’re here to help you too. If you’d like our help or wish to discuss anything further with us, please fill in your details below and one of the team will be in touch. Alternatively, give us a call on 0333 200 0714.

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    If you found this article interesting and would like to continue reading, you may find our previous blog post, ‘Advantages and Disadvantages of a Limited Company‘.

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