DISSOCIATION AND DISSOLUTION OF A PARTNERSHIP Flashcards
DISSOCIATION:
The term “dissociation” simply refers to a withdrawal. When a partner dissociates from a partnership, the partner
withdraws or “bows out” of the partnership.
EVENTS OF DISSOCIATION: The statute specifies various events of dissociation, including, among others:
- a partner giving notice to the partnership of his desire to withdraw (dissociation by “express will”);
- a partner’s expulsion, death, or bankruptcy;
- an agreed-upon event; and
- the appointment of a receiver for a partner.
WRONGFUL DISSOCIATION:
A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement. A dissociation is also wrongful in a term partnership if the 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 the dissociation.
“at-will partnership”
An “at-will partnership” is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. It is the default form of partnership. (Most partnerships
are at-will.)
“term partnership”
A “term partnership” is the converse—it is 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.
CONSEQUENCES OF DISSOCIATION: When a partner dissociates from a partnership, one of two statutory avenues is implicated.
- The first avenue provides that the partnership is dissolved and that its business must be wound up. This means that the partnership business will be liquidated (“sold off”).
- The second avenue provides that the partnership continues in existence with the dissociated partner becoming entitled to a buyout of his partnership interest.
The nature of the event of dissociation dictates which avenue is
- implicated.
DISSOLUTION: Dissolution and winding up are required only in limited circumstances (e.g., event in agreement requiring winding up, business becomes illegal, issuance of a judicial decree, unanimous consent of the partners in a term partnership, expiration of a term partnership). Two
circumstances are of particular importance:
- In an at-will partnership, any partner who dissociates by express will may compel dissolution and winding up.
- In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, 1/2 of the remaining partners agree to wind up the partnership.
BUYOUT AND CONTINUATION OF THE BUSINESS:
If a partner’s dissociation does not result in a dissolution and winding up, the partner is entitled to receive a buyout of his partnership interest. The remaining partners may continue the business.
If the dissociation is wrongful, any damages will be offset against the buyout price.
LIABILITY OF DISSOCIATED PARTNER:
Generally, a dissociated partner remains liable for pre-dissociation partnership obligations (a creditor can agree to release the withdrawing partner, however, from
specific obligations).
He may also be liable for post-dissociation partnership liabilities incurred within two years after the dissociation (assuming that dissolution has not occurred). He can protect himself by notifying creditors directly of his
dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing). The partnership can make the filing as well.
APPARENT AUTHORITY OF DISSOCIATED PARTNER:
A dissociated partner has apparent authority to bind the partnership for a period of time not exceeding two years after dissociation (assuming that dissolution has not occurred). The partnership can protect itself by
notifying creditors directly of the dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing).
DISSOLUTION: When dissolution and winding up occur (causes of dissolution are stated above), partnership assets must be applied to the discharge of partnership liabilities. If the assets are insufficient, individual partners are required to contribute (“pay in”) in accordance with their loss shares. If there are excess assets, they are distributable to the partners in cash
in accordance with their profit shares.
PRIORITY OF DISTRIBUTION: Each level of priority must be fully satisfied before beginning the next level.
a. First, the partnership must pay all creditors. Creditors include “outside creditors” (e.g., trade creditors, lenders, suppliers) and “inside creditors” (e.g., partners who loaned money).
b. Second, the partnership must repay all capital contributions paid into the partnership by partners.
c. Third, profits or losses, if any.
RIGHT TO WIND UP:
Partners who have not wrongfully dissociated may participate in the winding up of the partnership’s business.
APPARENT AUTHORITY
Partners retain apparent authority to bind the partnership to a third party on new business even after an event requiring winding up. But the partnership can protect itself by notifying creditors directly of the dissolution (effective immediately). In addition, any partner who has not wrongfully dissociated may file a public statement of dissolution (becomes effective 90 days after filing).
A partnership has a two-year term. May a partner dissociate before the term is up?
Yes, but the dissociation will be wrongful and the partner will be liable for damages since she agreed to stay for two years. The other partners can continue the business without dissolution and winding up; a buyout of the dissociated partner will be required.
A partnership is formed to buy a piece of land, subdivide it, and sell off the lots. Can a partner
dissociate before the last lot is sold off?
Yes, but the dissociation will be wrongful. This is a term partnership because it is a partnership to accomplish a particular undertaking. The partner will be liable for damages since she agreed to stay until the
undertaking was completed. The other partners can continue the business without dissolution
and winding up; a buyout of the dissociated partner will be required.
