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WHAT HAPPENS WHEN ONE PARTNER LEAVES A PARTNERSHIP?

Steven E. Springer July 9, 2015

In California, a general partnership is an association of two or more persons, acting as co-owners of a business for profit. Any partner in a partnership is free to dissociate, or leave the partnership, at any time.

DISSOCIATION

In California, several circumstances will trigger dissociation, and includes the following:

  •         If a partner gives notice of his or her withdrawal;

  •         An agreed-to event in a partnership agreement triggers dissociation or expulsion;

  •         In some circumstances, the unanimous vote of all other partners;

  •         Judicial expulsion, if a partner acted wrongfully;

  •         A partner’s bankruptcy;

  •         A partner’s death or incapacity; or

  •         Other statutory circumstances.

A partner’s dissociation may be either rightful or wrongful. Dissociation is wrongful when it is a breach of the partnership agreement, or, if the partnership is for a definite term or undertaking, when a partner dissociates before the end of the partnership. Whether dissociation is rightful or wrongful may affect a partner’s return on his or her investment in the partnership.

DISSOLUTION

If a partnership is composed of only two partners, the dissociation of one partner automatically triggers dissolution. Hence, the partnership must “wind up” its affairs—liquidate assets, pay off debts, and distribute the remainder between the partners.

If there are three or more partners, however, dissociation does not trigger dissolution. Instead, the partnership must buy out the dissociating partner’s interest. The partnership remains intact, unless the partners vote to dissolve. A vote to dissolve a partnership requires the approval of at least one half of the partners in a partnership at will, which is a partnership not for a specific duration or undertaking.

PARTNER’S RIGHTS AND OBLIGATIONS

When a partner dissociates, he or she loses all right to participate in the management of the partnership’s business. Certain duties of the partner to the partnership also cease to exist. Dissociated partners remain accountable for any liabilities incurred by the partnership before the dissociation. Additionally, in some circumstances, the partner may be liable for debts incurred for up to two years after dissociation.

If the dissociated partner continues to hold him or herself out as a partner, and an unwitting third party enters into a transaction with the dissociated partner within two years after dissociation, then the partnership will be bound by that transaction. The dissociated partner, however, will be liable for any harm resulting from the transaction.

And if, within two years of dissociation, the partnership enters into a transaction with a party who reasonably believes the dissociated partner to still be part of the partnership, then the dissociated partner will be liable under that transaction. However, the third party and the surviving partnership may agree to release the dissociated partner from liability.

CONSULT WITH A MORGAN HILL BUSINESS LAW ATTORNEY TODAY

Every partnership is different, and the effects of a dissolution will depend upon your particular circumstances. Please contact a dedicated Morgan Hill business law attorney at The Law Offices of Steven E. Springer for a free 20-minute consultation if you need assistance with your case.