CAN A PARTNER WITHDRAW
FROM A BUSINESS WITHOUT
DISSOLVING THE BUSINESS?
A partnership may spring into existence with great hope and expectations, but after a while, disagreements over management and financial issues can often pit one partner against another, or even create factions if there are multiple partners involved. So what happens if one partner decides to withdraw? Does that mean the dissolution of the whole enterprise?
If you’re operating as a partnership in San Francisco, California, or the surrounding areas of San Jose, San Mateo, Santa Clara, Oakland, or Alameda County, The Law Offices of David H. Schwartz, INC. is here to help you with any business partnership issues. Attorney David H. Schwartz has been working to resolve partnership disputes for new ventures and established businesses for over 45 years and would be proud to use his knowledge and expertise to help you with your unique situation.
Common Reasons for a Partnership Dissolution
There are a number of different reasons that can lead to partnership disputes, but the most common include any of the following:
Different Management Styles
Disputes between business partners often arise due to differing management styles. Eventually, one or the other might chafe at the other’s approach, blaming every little setback or challenge on the other partner’s management style. One may even decide it’s not worth it anymore and choose to opt-out.
Financial issues typically play a significant role as well. What if one partner put up most, if not all, of the money to fund business operations? What is the other partner’s equity arrangement? If one or the other feels shortchanged, problems can arise quickly. What if there is a 50/50 arrangement but finances start to go south, and one partner refuses to come up with another cash infusion?
Conflicting Personal Habits
Personal habits can also begin to fray the relationship between business partners. One of the most common examples is how people tend to handle pressure in different ways. One partner may feel motivated with each new challenge that arises, while the other may tend to retreat into coping mechanisms that can threaten operations, such as substance or alcohol abuse. Others may simply back off from the challenges, leaving their partner with too much responsibility and a growing sense of resentment.
Many different disputes can arise even if the partners are best friends. At the end of the day, many partners often end up wondering — if either my partner or I decide to leave, does that mean the end of the business?
California’s Revised Uniform Partnership Act
A business owned and operated by two or more people that has not been incorporated is considered a general partnership (GP). In California, a general partnership does not need a written agreement or even need to be filed with the Secretary of State. However, it does fall under the statewide umbrella of what is called the Revised Uniform Partnership Act (RUPA).
Prior to the adoption of RUPA in 1997, if one partner left a general partnership, that was generally viewed as a dissolution and the partnership came to an end unless a written agreement provided other options. Under RUPA, if a partner leaves, it is viewed as a matter of dissociation, and the general partnership can survive as an intact business. RUPA views a partnership as an entity separate from its members.
RUPA covers not only general partnerships, which have loose organizational standards but also limited partnerships (LPs) and limited liability partnerships (LLPs). Both of these types of partnerships do need to be formally registered with the Secretary of State’s office.
Understanding A Partnership Agreement
Though California law doesn’t require a written agreement for a partnership, it is always in the best interest of all parties to put everything down on paper in the clearest form possible, spelling out each member’s duties, rights, and responsibilities. A well-crafted partnership agreement should cover at minimum the following topics:
Each partner’s capital contributions
Voting rules (if more than two partners)
Allocation of losses, draws, and profits
Steps to admit or withdraw partners
RUPA requires that all partners share management decisions equally, so in a partnership of three or more members, majority votes rule. If there are only two partners, dispute resolution may have to take alternate forms such as mediation or arbitration. All of these details need to be spelled out in the partnership agreement in no uncertain terms.
When crafting a partnership agreement, it is always best to do so with the guidance and direction of an experienced partnership attorney. If circumstances change in the future, the agreement can always be revised or amended with the help of your attorney.
Handling Partnership Additions and Withdrawals
Even when everything is spelled out concisely, disruptions and disputes can always arise to threaten the ongoing operations of the partnership. If one partner does decide to withdraw, the process for that should be covered in the written agreement. A mechanism for adding a replacement or new partner must also be addressed prior to any dissociations.
What if another person or group makes an offer to buy the partnership’s business? How is valuation decided? That should be addressed in the agreement as well. Remember, though, that RUPA awards equal say to each partner. A partnership of two, which is the most common form, can also present the biggest stage for disagreements that can threaten to sink the ship. If the two partners remain locked in disagreement, the intervention of a third party, generally a business litigation attorney, is essential for negotiation and resolution.
How the Law Offices of
David H. Schwartz, INC. Can Help
Under RUPA, a partnership does not need to dissolve when one partner leaves. In practical terms, though, if one partner leaves the other partner stranded in a two-person partnership, the financial stress and added workload are often too much for one person to handle. That’s why it is so essential to try to plan for all eventualities, with tools and options in place to handle disputes when they first begin to surface.
At The Law Offices of David H. Schwartz, INC., business law attorney David H. Schwartz has helped countless clients resolve their differences before they lead to dissolution through alternative dispute resolution mechanisms such as negotiation, mediation, and arbitration. David stands ready to help you draft a partnership agreement or to review and revise an existing one to help you avoid complex disputes and ensure the survival of your business when disputes do arise.
Before matters ever get to the dissolution stage, call the Law Offices of David H. Schwartz, INC. If you live in the Greater San Francisco Bay Area, David would be happy to schedule a consultation and discuss the details of your situation.