Dissociation and Dissolution

Question 1

What is “dissociation”?

Answer 1

“dissociation” = a change in relationship of partners caused by any partner ceasing to be associated in the business.

NOTE –> dissociation does NOT necessarily cause dissolution and winding up of partnership business

Question 2

What events cause dissociation (7) ?

Answer 2

1. oral or written notice of partner’s EXPRESS WILL to withdraw;
2. happening of an AGREED UPON EVENT;
3. valid EXPULSION of partner;
4. partner’s BANKRUPTCY;
5. partner’s DEATH or INCAPACITY to perform partnership duties;
6. decision of COURT that partner is incapable of performing his duties
7. TERMINATION of business entity that was a partner

Question 3

What are the consequences of a “dissociation”?

Answer 3

1. partner’s right to participate in management ceases
2. partnership must purchase his interest at either liquidation or going concern value
3. partnership must indemnify him against KNOWN pre-dissociation liabilities, as well against post-dissociation liabilities not incurred by dissociating partner’s acts

Question 4

What is the liability of a partner who disassociates in violation of the partnership agreement or before the expiration of a partnership term?

Answer 4

• he will be liable to the partnership for damages caused by wrongful dissociation
• he will not be entitled to payment of buyout price until term expires or undertaking is completed, unless he can establish that early payout will not cause undue hardship to the partnership business

Question 5

What is dissociated partner’s power to bind partnership?

Answer 5

A partnership can be bound by an act of a dissociated partner undertaken within TWO years after dissociation, IF:

1. the act would have bound the partnership before dissociation, AND
2. the other party to the transaction
   (i) reasonably believed the dissociated partner was still a partner; AND
   (ii) did not have have notice of the dissociation

Question 6

What is dissociated partner’s liability to other parties?

Answer 6

A dissociated partner can be liable for for obligations incurred by the partnership within TWO years after the partner dissociates IF:

1. when entering the transaction the other party REASONABLY BELIEVED the dissociated parter was still a partner and
2. did not have notice of the partner’s dissociation

NOTE –> a dissociated partner can cut short this period of liability by filing a NOTICE OF DISSOCIATION with the secretary of state. All persons are deemed to have notice of a dissociation 90 days after such a notice is filed