Dissolution of Partnership vs Termination of Partnership: What Is the Difference?

dissolution of partnershipSo you’ve been in business with your partner for years. You chose to form a partnership to keep it simple. Even though your business is successful, your partner wants out of it.

You might’ve heard the term dissolution of partnership and termination being thrown around a lot. But, are they the same thing? How do these terms differ?

If you’re here it means that you want to know if you’ve to dissolve or terminate your partnership. Not sure what to do? Don’t worry!

We’ve you covered. We’ll tell your differences between these terms and what happens when you end a partnership. Read on to learn more!

Dissolution vs Termination of Partnership Agreement: Are Both the Same Thing?

Before we go into the details about the dissolution and termination of a partnership, we’re going to discuss the basics. What is a partnership? What are its legal requirements?

A partnership is when two or more people agree to do business together for profit. This type of entity can form even when there isn’t any formal written agreement. The state of Florida requires you follow to the registration, tax and filing partnership regulations.

In a general partnership, members contribute and share profits and losses according to their equity shares. The Florida Revised Uniform Partnership Act (FRUPA) establishes that for a partnership to form it may register with the Department of State.

The filing will include the information about the members, business address and other details. Members don’t have to file the partnership agreement. This agreement establishes the guidelines of the partners’ relationship.

This agreement may be oral or written. The document will say how the partnership can end. If it doesn’t detail the process, you’ll have to follow the process from FRUPA or the applicable law in your state.

If you haven’t read your partnership agreement, it’s better late than never. That document is a great starting point to know where you stand. It can give you a better idea of how the termination or dissolution of the partnership will take place.

We recommend you consult a business law attorney if you’ve questions about your partnership agreement. They can tell you more about your options. Because your partner can leave your partnership but, they’ve to follow the process from the agreement or law.

What Is Dissolution of Partnership?

The dissolution of a partnership is when the decision for termination is made. Here the partners follow the steps for dissolution from the partnership agreement. The process may be taking a vote or action to dissolve the entity.

If there isn’t a partnership agreement, you must follow the applicable state laws. If you’re dissolving a general partnership in Florida, you should file a Certificate of Dissolution. You’ve to file this certificate with the Department of State.

It will include the reason for dissolution, and signature of the partners. A partnership can end by agreement between the partners, bankruptcy or by court order. Another reason partners can use is dissolving by order of the partnership deed.

Florida law doesn’t require you file a Certificate of Dissolution for a general partnership. We recommend you file one to limit your liability. Remember general partnerships make their partners responsible for any liabilities.

If you’re dissolving a limited partnership in the state of Florida, you’ll have to follow the FRUPA law. It governs the formation, management, and dissolution of limited partnerships in this state. If you’re dissolving an out-of-state partnership, you should consult your local state laws.

What Is Termination of Partnership?

Terminating a partnership is when you close down your business. The wind-up process is the next steps taken after the dissolution. During this process, you must complete all partnership projects.

If the partners agree, they’ll sell all or some of the partnership assets. During the wind-up, the partners will take care of paying all debts. The remaining assets will go to the partners.

The distribution will happen according to the equity ratios from the partnership agreement. You should make sure to pay all the partnership’s debts before any distribution. In states such as Florida, the law establishes the order for people to get paid during the wind-up.

Most of the time, creditors are the first to get paid. After them, partners will receive any capital contributions they’re entitled to. If anything is remaining after, it will go to partners for distribution.

What Happens After the Dissolution and Termination of a Partnership?

After you’re done with the wind-up process, you won’t have any more legal requirements to worry about. You should notify your suppliers, creditors, and customers. They need to know about your partnership dissolution.

This way no one can keep doing business with them using your name. This will help prevent any legal issues in the future. There have been cases where a partner has continued doing business afterward.

If a partner keeps using the name of the partnership, you can be liable for that deal. The only way to prevent this is by notifying the party of your dissolution. You could send them a letter or publish a notice in one or more local newspapers.

In some states, you’ve to get a tax clearance before dissolving the partnership. Florida is an exception to this rule. Yet, you’ve to notify the Department of Revenue about closing the business.

Also, you’ll have to submit the final IRS return for your business. We recommend you consult a tax professional for more information. Did you register your partnership in other states?

If this is the case, you’ll have to follow the same process in those states as well. This also applies if your partnership is doing business in other states. If you don’t terminate the partnership in those states, you’ll be liable for taxes and other fees.

Bottom Line

At the end of the day, dissolution of partnership is part of the termination process. Because the partners have to decide to dissolve it before terminating the partnership.

Partnership termination can be a complex process. That’s why we recommend you consult an attorney. They can tell you more about your options and guide you during the process.

Do you have to dissolve and terminate your business partnership? We can help!

Contact us to schedule your first consult today.