Dissolution Vs. Termination of Partnership

by Ciaran John, Demand Media

Partnerships are legal business entities that have two or more owners. Business partners have the legal right to terminate a partnership agreement at any time. When this occurs the business ceases to exist. Many people use the terms "dissolution" and "termination" interchangeably but from a legal point of view, these are two different phases in the break up of a partnership.


The Internal Revenue Service (IRS) defines a partnership as a business relationship that involves two or more people. Definitions of partnerships vary by state but in most instances partnerships are formed when two or more people embark on a joint enterprise with the intention of generating profits. In some states you must register a partnership. In other states you can have a valid legal partnership solely on the basis of a verbal agreement.


The dissolution of a partnership occurs when one of the partners leaves the business. This happens when a partner resigns or dies, and can also occur if the other partners expel a partner from the business. The business continues to operate after the dissolution but only for a limited period of time. The outgoing partner must negotiate a settlement with the other partners that details the division of the firm's assets between the owners. Dissolutions go to court if the partners cannot agree on how to split the firm's assets and liabilities.


Under state and federal laws, the termination of a partnership occurs when it ceases operations. Additionally, the IRS regards a partnership as having been terminated if more than 50 percent of its assets are sold or disbursed within a 12-month period. Therefore, partnership terminations are easily distinguished from dissolutions because the partnership remains active during the dissolution process. It could take several years for the partners of a major firm to reach agreement on the dissolution of the business but all activities of the partnership cease upon termination.


In some states you remain liable for the partnership's debts during the dissolution process. In this case you are not entirely free of your obligations to the firm until the business ceases to exist. Generally, you must dissolve and then terminate a partnership if any partner leaves. If you and the other remaining partners want to continue to work together then you must simply create a new partnership after the original partnership stops operating. However, in some states, such as Ohio, you can keep a partnership active after the departure of one partner if the other partners buy out that partner's share of the firm. Generally, you can only do this if your original partnership agreement included a buy-out clause.

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