Dissociation and Dissolution of a Partnership Flashcards
Dissociation
- A change in the relationship of the partners caused by any partner ceasing to be associated in carrying on the bsuiness.
- When a partner dissociates from the partnership, the partner withdraws from the partnership.
Events of Dissociation
A partner becomes dissociated from the partnership by:
1. oral or written notice of the partner’s express will to withdraw;
- happening of an agreed event;
- valid expulsion of the partner;
- the partner’s bankruptcy or appointment of a receiver for a partner;
- the partner’s death or incapacity;
- decision of a court that a partner is incapable of performing a partner’s duties;
- termination of a business entity
Wrongful Dissociation
- If the dissociation is in breach of an express term of the partnership agreement.
- If partner withdraws, is expelled, or becomes bankrupt before the end of the term;
A partner who wrongfully dissociates is liable to the partnership for any damages caused by dissociation.
At-Will Partnership
- A partnership where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking.
- The default form of a partnership.
*** Notice of a partner’s express will to withdraw from a partnership at will automatically triggers dissolution of the partnership. **
Term Partnership
A partnership where the partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking.
Dissolution
- The act of bringing an end to a legal relationship between partners.
- Dissolution and winding up are required only in limited circumstances.
- In an at will partnership, when a partner dissociates by express will, the partnership is dissolved and its business must be wound up.
- In a term partnership, if one partner dissociates wrongfully or because of death/bankruptcy, etc –> dissolution and winding up are required ONLY IF within 90 days, at least 1/2 of the remaining partners agree to wind up the partnership.
Consequences of Dissociation
For The Partnership –
(Option 1):
* The partnership is dissolved and its business must be wound up.
* The partnership business will be liquidated. (Option 2):
* Partnership continues in existence with the dissociated partner becoming entitled to a buyout of their partnership interest.
For The Partner –
* Partner’s right to participate in management ceases;
* Partnership must purchase partner’s interest at either liquidation or going-concern value;
* Partnership must indemnify partner against known pre-dissolution liabilities and post-dissociation liabilities not inccured by the dissociating partner’s acts;
For the Wrongfully Dissociation Partner of Term Partnership –
* Not entitled to payment of buyout price until term expired or undertaking is completed.
Buyout and Continuation of the Business
- If a partner’s dissociation does not result in a dissolution, the partner is entitled to a buyout of his partnership interest.
- Remaining partners may continue business.
- If dissociation is wrongful, any damages will be offset against the buyout price.
Liability of Dissociated Partner
- A dissociated partner is liable for pre-dissociation partnership obligation.
- A creditor can agree to release the withdrawing partner from specific obligations.
- A dissociated partner can be liaible for post-dissociaton liabilities incurred within two years after the dissociation if:
1. the other party reasonably believed the dissociated partner was still a partner when entering the transaction; AND
2. other party did not have notice of partner’s dissociation.
Notice of Dissociation
- Notice of Dissociation - A public filing that provides constructive notice of a partner’s dissociaton.
- Notice becomes effective 90 days after filing.
- A partnership can file the Notice too.
- A dissociated partner can protect themselves from liability by notifying creditors directly of their dissociation or by filing a notice of dissociation.
Apparent Authority of Dissociated Partner
A partnership can be bound by an act of a dissociated partner undertaken within 2 years after dissociation if:
1. Act would have bound the partnership before dissociation, AND
2. the other party (a) reasonably believed the dissociated partner was still a partner, AND (b) did not have notice of the dissociation.
Dissolution and Assets
- When dissolution and winding up occur, all of the assets must be sold off and all partnership obligations must be paid off.
- If assets are insufficient, the partners are required to contribute in accordings with their loss shares.
- If there are excess assets, they are distributed to partners in accordance with their profit shares (in cash).
Dissolution of a Partnership at Will
A partnership at will can be dissolved at any time by the express will of ANY partner without penalty.
Events Causing Dissolution
- Notification by any partner of an express will to withdraw;
- Expiration of a term or completion of the undertaking (for a Term Partnership);
- Consent of all the partners to dissolve;
- Within 90 days, after a partner’s death/bankruptcy/wrongful dissociation, if at least half of the remaining partners wish to dissolve. (For a Term Partnership)
- Happening of an event agreed to in the partnership agreement;
- Happening of an event that makes the partnership unlawful;
- Issuance of a judicial decree on application by a partner that: (a) frustration of purpose; (b) no longer reasonably practicable to carry on the business; (c) business cannot be practicably carried on.
- Issuance of a judicial decree on application by a transferee
- Passage of 90 consecutive days during which the partnership does not have at least two partners
Priority of Distribution
- Partnership must pay all creditors.
- Partnership must repay all capital contributions paid into the partnership by partners.
- Profits or losses, if any.
