Can You “Abandon” a Partnership? (Corp. Code, § 16801.)
Yes. In California the legal process of “abandoning” a partnership is called partnership dissolution. Partnership dissolution is the legal process of ending a business partnership, either voluntarily or involuntarily. Reasons for dissolution include completion of business goals, a partner’s death or incapacity, or the partners’ mutual agreement. The Uniform Partnership Act (“UPA”) governs partnerships and their dissolutions providing procedural steps for the partnership’s end including liquidation of assets, settling debts, and distributing profits or losses among partners. Understanding how partnership dissolution works helps ensure the fair resolution of business affairs for all involved parties.
What is Partnership Dissolution?
Partnership Dissolution is the process through which partnerships dissolve and partnership business is “wound up.” Specifically, dissolution is a change in the partners’ relationship caused by any partner leaving the association invoking the partnership’s “winding-up” process. (Freese v. Smith, (1952) 114 Cal.App.2d 283.)
Under California Partnership Law, dissolution happens when a partner abandon’s the partnership. Abandonment can occur in various ways including, the partner’s express will or on occurrence of other specified events in the partnership agreement. (Corp. Code, § 16801.) Dissolution occurs by law upon a partner’s death or by a judicial determination finding dissolution is equitable or necessary due to a partner’s conduct or other circumstances. (Tsakos Shipping & Trading, S.A. v. Juniper Garden Town Homes, Ltd., (1993) 12 Cal.App.4th 74.)
Dissolution does not immediately terminate the partnership. Instead, the partnership continues until the partnership’s “winding-up” process is completed. (King v. Stoddard, (1972) 28 Cal.App.3d 708.) Likewise, a partner’s authority to act on the partnership’s behalf generally terminates upon dissolution, however, the partner retains authority to perform acts necessary to complete outstanding transactions and facilitate the partnership’s winding-up process. (Glassell v. Prentiss, (1959) 175 Cal.App.2d 599.)
What is the “Winding-Up” Process?
In partnership dissolutions, the “winding-up” process is the final step before the partnership officially terminates. “Winding-up” is the process of completing the partnership’s uncompleted transactions, reducing all partnership assets to cash, and distributing proceeds among partners. (Heller Ehrman LLP v. Davis Wright Tremaine LLP, (2018) 4 Cal.5th 467.) As such, a partnership is not immediately terminated by dissolution but instead continues until the partnership’s affairs are “wound up.” (Vangel v. Vangel, (1953) 116 Cal.App.2d 615.)
Who Can Participate in the “Winding-up” Process?
Partners who have not yet dissociated can participate in winding-up the partnership’s business. (Corp. Code, § 16803.) Alternatively, the last surviving partner’s legal representative may participate in winding-up the business. (Ibid.) Participating partners must take several steps to ensure the winding-up process is properly completed to terminate the partnership. (Glassell v. Prentiss, 175 Cal.App.2d at 605.) Notably, courts may order judicial supervision of the winding up for good cause shown by any partner, their legal representative, or transferee’s application. (Corp. Code, § 16803.)
The individual, or partner, winding-up the partnership’s business retains authority to preserve the partnership’s business or property as a going concern for a reasonable time. This individual may also prosecute and defend actions and proceedings against the partnership, settle and close the partnership’s business, dispose of and transfer partnership property, discharge the partnership’s liabilities, distribute the partnership’s assets, settle disputes by mediation or arbitration, and perform other necessary acts. (Corp. Code, § 16803; Heller Ehrman LLP v. Davis Wright Tremaine LLP, 4 Cal.5th at 481-82.)
For law partnerships, the winding-up process requires performance of acts necessary to preserve legal matters for transfer to new counsel, to effectuate such a transfer, and collect on work done pre-transfer. (Heller Ehrman LLP v. Davis Wright Tremaine LLP, 4 Cal.5th at 481; Corp. Code, § 16803(c).)
Partners’ Rights to Distribution of Assets in “Winding-Up”
Distributing partnership assets is one of the most crucial steps in any partnership’s winding-up. In asset distribution, each partner is entitled to a settlement of all partnership accounts, and portions of the partnership’s profits and losses per their right to distributions. (Corp. Code, § 16807.) Despite their right to distributions, partners are not, however, first in line to receive distributions of assets. Instead, partnership assets are first applied to discharge the partnership’s remaining creditor obligations, including discharging partners who are creditors. (Ibid.) Once creditor obligations are settled, any asset surplus is distributed to partners in accordance with their right to distributions. (Ibid.) A partner’s right to distribution, or right to share in post-dissolution profits, is based on the partnership’s use of each partner’s interest in the firm’s capital. (Oliker v. Gershunoff, (1987) 195 Cal.App.3d 1288.)
Partners are entitled to an accounting of the partnership’s profits from the time of dissolution until the winding-up. (Urzi v. Urzi, (1956) 140 Cal.App.2d 589.) So, if one partner continues the business using existing partnership assets, they are accountable to the exiting partner for profits acquired during the period between dissolution and winding-up.
Until a partnership’s affairs are “wound up” partners can only bring equitable claims enforced in accounting actions. (Driskill v. Thompson, (1956) 141 Cal.App.2d 479.) Courts cannot enter personal judgments until all partnership assets are converted into money, debts paid, and the partnership’s final balance is determined. (Pilch v. Milikin, (1962) 200 Cal.App.2d 212.)
In short, during the winding-up process partners are entitled to discharge partnership liabilities, receive a distribution of any remaining assets proportional to their interests, and must claim profits from using their share of assets to continue the partnership post-dissolution.
What is an Example?
“Shawn” and “Julie” are business partners who own a coffee shop together. Over time, Julie decides she wants to pursue a new career and no longer wants to continue in the partnership with Shawn. Julie tells Shawn she wants to dissolve the partnership, and after extensively discussing the matter, Shawn agrees.
Shawn and Julie begin their partnership’s dissolution by following the terms outlined in the agreement they executed at their partnership’s beginning. Accordingly, Julie and Shawn administer the businesses’ winding-up together by liquidating their assets, including equipment and inventory, settling business debts, and dividing the remaining profits equally based on their agreed upon shares. Shawn and Julie agree Shawn will continue the business independently upon their partnership’s dissolution.
Once Shawn and Julie complete the coffee shop’s winding up, their partnership terminates. Now, Julie exits the partnership to pursue her new career and Shawn, no longer in partnership with Julie, can continue running the coffee shop independently or by associating with a new partner without involving Julie.
Conclusion
Partnership dissolution is a complex legal process requiring careful navigation to ensure the most equitable outcome possible. The Underwood Law Firm has a team of experienced lawyers who can help guide you through complicated legal matters like your partnership’s end and help you pursue solutions to ensure you recover the entirety of what you are legally entitled to. We are here to help.