When terminating a partnership, it is essential to consider the legal implications that may arise. It is important to seek legal help in order to ensure that all legal requirements are met when you choose to terminate the partnership. This blog post will discuss seven of the most important legal considerations when terminating a partnership, and the steps necessary to ensure the dissolution of the partnership is completed in accordance with the law.
1) Ownership
When terminating a partnership, you are terminating joint ownership of everything of and relating to that partnership’s business. It is critical to determine when attempting to sever the partnership who will retain, and who will forfeit their share of the business after the termination is complete. For example, who is entitled to collect on unpaid A/R? How should the partnership’s cash balance be split? Who gets the partnership’s IP (website copyrights, trademarks in the name of the partnership, trade name, etc.)? Who must take ownership of the partnership’s outstanding debts? Who gets the assets? These considerations are critical for any partnership termination.
2) Ongoing Business After Termination
When terminating a partnership, typically at least one of the partners (if not both) wishes to continue the business or continue operating in the same industry, often relying on the partnership’s existing customers, vendors, intellectual property and/or contracts to continue the business after termination. This can be problematic however if the exiting partner wants to prevent the use of partnership assets, even after that partner stops contributing to the efforts of the business. A clean partnership termination that avoids litigation addresses these issues head-on before termination. Generally, this means agreeing to an assignment of rights from the exiting partner to the continuing partner(s). This assignment should cover any partnership assets such as customer lists, vendor lists, trademarks, copyrights, contract rights, supplier relationships, etc. The agreement should also contain a provision requiring ongoing payment for use of any of these assets by the continuing partner(s). Moreover, any continuing partner should agree not to solicit away any employees who may have worked with the dissolved partnership.
3) Implementation of your Termination Plan
It is one thing to come to a general agreement on how the partnership should dissolve. It’s an entirely distinct challenge to implement that termination plan in a manner that avoids future costs, challenges or suits. What’s more, typically when a partnership is on the cusp of dissolution or termination, one or both partners slow down or altogether stop performing for the benefit of the business. Proper implementation of a partnership termination plan involves 1) drafting and executing a comprehensive termination plan; 2) ensuring during the wind-down phase that each partner is contributing their best efforts to avoid avoidable business loss; 3) oversight to ensure the executed termination plan is followed to a T; & 4) execution & filing of all necessary documents to give full legal effect to the termination of the partnership.
The Venture Attorney can help.
If you are contemplating the end of a partnership, the Venture Attorney can help ensure a smooth and efficient transition. Call today.