Can a Partner Withdraw Without Dissolving the Business?
Nov. 28, 2023
It’s relatively easy to form a general partnership in Michigan. There are no papers to file or licenses to obtain from the state, but the locality where you intend to conduct business may well impose licensing, permitting, and zoning requirements. While you and some of your friends, family members, or associates may shake hands to form a partnership to market widgets, there are still many details to be ironed out.
For instance, who among the partners is going contribute what? Are all just going to ante up a share of the start-up costs, or is one or more partners going to contribute in another way, perhaps through professional expertise?
Who is going to manage operations, everybody together or through a kind of managing agreement over who does what? Then, in drawing up the partnership agreement—which should be in writing and agreed to by all the partners—you also must address the issue of what happens if one partner wants out. Does that mean the partnership ends with that person’s departure?
In other words, if you create a partnership without an overall partnership agreement addressing the full range of issues that might arise during the course of the partnership’s existence, you might indeed find yourself in a corner, where the departure—or demands—of one partner may well sink the whole enterprise. It’s the Boy Scouts’ motto writ large—“Be prepared.”
If your partnership in or around Troy, Michigan, is facing the possibility of one partner departing, and thus leaving the fate of the partnership in question, reach out to The Law Offices of Barton Morris. I have helped countless others draw up agreements and contracts to protect their rights and interests, and I can advise you too, whether you have a written agreement or just a few handshakes. I also proudly serve clients throughout Oakland and Macomb counties.
Common Reasons for a Partnership Dissolution
Generally speaking, a partnership must be well structured, well managed, and turn a profit at an agreed-upon point. The partners may agree to underwrite operations while the business gets off the ground, but at some point, they’ll want to see profits or they might decide it’s time to end the outflow of their cash—so dissolution can become the only way out.
It might also be the case that one partner does something unethical or illegal, or exposes the company to loans or obligations that cannot be legitimately covered by operations. In other words, bankruptcy or other legal actions may sink the ship because of one partner’s bad or even unethical decision-making.
There’s also the potential for one or more partners to decide they want to move on, perhaps to another business, or for health reasons, or just to retire. What happens when one person decides to depart? This should be addressed in the partnership agreement. You can include a buyout clause so the other partners can pay the departing partner off for his or her contributions.
There can also be a clause that a partner who wants out must first offer to sell his or her share to the other partners. This can prevent someone showing up unannounced at the door one day and announcing, “I’m taking John’s place, and here’s what we should do with our business.”
Revised Uniform Partnership Act
Michigan, like many other states, adheres to what is called the Uniform Partnership Act (UPA) with some revisions of its own. Part IV, Section 449.18 spells out “Rules for determining rights and duties of partners.” This section provides general guidelines for how partners are admitted, treated, and remunerated, and it also gives the majority of the partners to decide any “difference arising as to ordinary matters connected with the partnership business...”
This does not mean your partnership agreement cannot take a different or nuanced approach to matters, but if there is no agreement, then the Uniform Partnership Act becomes the legal basis for any disputes or challenges facing the partners.
Drawing Up a Partnership Agreement
As noted briefly above, there are many issues to be addressed in a partnership agreement. Certainly, how to handle a partner’s interest, investment, and other contributions should that person decide to leave is one priority. Buyout agreements are one route to this. There should also be a section on resolving business and management disputes or disagreements. There can be a clause concerning mediation and/or arbitration.
Management-wise, the agreement should address who Is going to do what in running operations. How do the partners make decisions? Are there any formal or informal meetings that can be called to settle any issue that arises? How do you admit new partners if that becomes a viable option at some point? How is the decision to dissolve the partnership arrived at?
You no doubt want to have the aid of an experienced business litigation and business law attorney in drawing up a partnership agreement, or reviewing what you have—or don’t have—if a partner decides to opt out.
Knowledgeable Legal Advice
If you’re thinking of forming a partnership and need a partnership agreement created, or if you already are involved in a partnership and have an agreement in place, when disputes arise, or when one partner decides to move in another direction, contact me at The Law Offices of Barton Morris. A properly crafted partnership agreement can help stave off calls for dissolution of the entity if challenges arise or partners decide to move on. I serve clients in Troy, Michigan, and throughout Oakland and Macomb counties.