Partnership Dissolution Agreements Explained
A partnership dissolution agreement is the formal document that all partners sign when they are terminating their business relationship. It specifies the reason for the termination, how assets and liabilities are allocated, and other information about how the parties plan to tie up using the business . It’s important so that parties can preserve their legal rights to pursue any further action they may want once the dissolution is complete. For example, if the parties will be suing each other for mismanagement, they want to make sure that their compensation is spelled out so that there are no further issues.
What Should Be in a Partnership Dissolution Agreement?
Essentially, the partnership dissolution agreement contains the following key components for a proper dissolution:
Asset Distribution
The assets of the partnership will be distributed either in cash or in kind. The parties can agree on how to divide all property between themselves, including vehicles, equipment, inventory, receivables, securities and real estate. The parties are usually allowed to divide this property according to their own accord which is subject to any tax consequences that may exist.
Liability Settlement
In a dissolution, there need to be distributions for the liability of the company, including its debts. Similarly to how assets can be split between the partners, the same can happen with the liabilities. The limited assets can be used to pay any creditors. This means that if there were no resources from the partnership to pay the debts, there is an agreement on who will owe these to the creditors. This is especially important to consider when the partnership has been in business for awhile, as the net worth could be close to zero after debt.
Closure of Bank Accounts
This agreement will also indicate whether or not the court is going to allow the closure of bank accounts. Often, close without any complications as the parties would have already divided the assets. It is important to note that partners should not separately retain funds from the partnership accounts after the completion of the dissolution.
Formatting a Dissolution Agreement in Word
When creating a partnership dissolution agreement, Microsoft Word can be invaluable for formatting the document. To maintain a clear and professional-looking document, it is important to follow some basic layout principles. First, when you provide a title, it should be centered across the page and bolded, such as "Agreement to Dissolve XYZ Partnership." The words "Agreement to Dissolve" should be 32-point font, font type Arial, and font color blue. "XYZ Partnership" should be 48-point font and font color red – this makes the parties’ names pop on the page. At the left margin, begin numbering sections with decimal points (e.g., 1. and 1.1, 1.2, 1.3 and so on). It helps to have gates that signify each section at decimal point junctions. Sections should be single spaced but always contain a minimum of 16 points of spacing after the period. If there is an affinity for bullet points and lists, no more than five items should be included per bullet, and no more than three bullets should be used in a list without numbering them. Under paragraph headings, there can be no more than seven lines before the next entry. The font type for the Agreement is Times New Roman. The font color is black. The font size is 12 point. The first line of a new paragraph is indented one-half inch. Each successive line is indented one-quarter inch. There is no indentation for the headings.
How to Draft the Dissolution Agreement: A Step-by-Step Plan
The steps below are intended as a guide only and you should seek professional advice prior to proceeding with the process.
Step 1: Open the Template in a Word Processor
Double click on the Microsoft Word document you have downloaded so that the document is opened in Word.
Step 2: Adjust the Document’s Margins
Go to Layout > Margins > and select Normal. This should change the margins of your document to have the same space on the left, right, top and bottom of every page. Alternatively you can click ‘Narrow’ to change the layout to a more compact fit.
Step 3: Customise the Title to your Own
To edit the title of the template, click on the title to enable editing. Also adjust the font size and type to your preference in the ‘Home’ tab. The title of the agreement should include the words ‘Partnership Dissolution Agreement’.
Step 4: Fill Out the Names of the Parties
Scroll down and fill out the blanks with the names of your partnership’s parties. If you are a company, enter the name of your company, business or LTD. Leave the middle section of this area blank if you do not wish to include them. The last section should contain a detailed explanation of how the shares of the company should be divided amongst the exiting members. You may append it as a schedule at the bottom of the document or include it in this section.
Step 5: Insert Essential Clauses
Scroll down and review the clauses included in the entire document. You should add and remove clauses as necessary.
Step 6: Finalise the Document
Save the document in the proper format and print the document ready for signing.
Common Pitfalls and How to Steer Clear of Them
Creating a partnership dissolution agreement on your own can be especially tricky, especially if you are new to legal documents such as those drafted in Microsoft Word. There are a number of common mistakes many people make when drafting a dissolution agreement, and we will explore some of them below. One misstep often taken is the failure to properly format your headings. This is an important part of the drafting process, as it provides you with structure throughout the document and improves the usability of your agreement. In most instances, you will want your headings, subheadings and any subsections to be appropriately formatted as different levels or sections (Heading Level 1 for main sections, Heading Level 2 for subsections and so on). Rather than formatting each level of heading manually, you can use the Heading Styles featured in the References and Home tabs of Microsoft Word. Once you have defined all of your headings , you can automatically create a table of contents by heading in the Reference toolbar. Another mistake is failing to insert the appropriate page breaks between each section of the agreement. Having all of your text running together can make it difficult to read through the document to find specific terms. You can insert page breaks throughout your document by selecting Insert Page Break from the Insert menu, which will let you begin each section on a new page. You can always remove page breaks if you find them to be disruptive by going to the Insert menu and hitting the Remove Break option. Finally, many people simply skip a final review of their dissolution agreement before it is complete. The biggest mistakes are often made late in the drafting process after a document is already in a nearly-completed or draft state. Before any major revisions are made, careful review of your text is absolutely crucial to ensure that everything flows correctly between headings and subheadings. A document is not simply a sequence of clauses—there needs to be a logical flow in order for it to be effective. Reviewing the text before you finish is an important step that will save you a lot of time by finding errors early on in the final stage of drafting.
Partnership Dissolution from a Legal Perspective
As you create your Partnership Dissolution Agreement in Word, you’ll want to do so in compliance with state laws and other regulations. The U.S. Small Business Administration says states require business owners to take specific steps when it comes to dissolving a partnership. Failing to comply with those steps could put the owners and the business at risk.
For example, you often need to notify creditors (including the IRS) that you are ending a partnership. Then, you’ll need to settle any debts, notifying any creditors of your intent to dissolve the partnership. The SBA advises that owners should "make arrangements to pay fiscal year-end taxes even if you will cease doing business during the year."
You also might want to close all existing bank accounts in the name of the partnership. In some cases, the SBA recommends order to pay creditors out of each owner’s equity share in the business. You’ll want to file your Partnership Dissolution Agreement as soon as you make the decision to dissolve the partnership.
Sample Dissolution Agreement for a Partnership in Word
To assist practitioners in the drafting process, I have provided a downloadable sample of a partnership dissolution agreement template in Word format. This template is offered as a resource or framework for further reflection and drafting considerations and is not a substitute for developing an agreement based on the specific needs and circumstances of the partnership.
PARTNERSHIP DISSOLUTION TEMPLATE:
This Partnership Dissolution Agreement ("Agreement") dated as of [Effective Date].
BETWEEN:
[Parties] of [Address of each partner] (the "Parties").
WHEREAS the Parties own and operate a partnership under the name: [Partnership Name] (the "Partnership"), located at: [Location of Partnership Business].
AND WHEREAS the Parties wish to wind up the business of the Partnership and terminate it pursuant to the terms and conditions of this Agreement.
NOW THEREFORE in consideration of the covenants and mutual obligations herein contained, the undersigned Parties agree as follows:
1. Dissolution
(a) The Parties agree that the Partnership shall be dissolved effective [Date of Dissolution].
(b) The management and operation of the Partnership shall remain solely with [Name or names], until all debts and liabilities of the Partnership are paid, satisfied, or settled, or until the assets of the Partnership are fully disposed of.
(c) All the necessary books and records of the Partnership shall be maintained in the City of [City] for a period of [Period of Time] following the execution of this Agreement, after which all necessary books and records shall be maintained in the province of [Province].
(d) Any agreement, deed, lease, note, mortgage, or other instrument under which the Partnership is a party shall not be canceled or extinguished, except as may be necessary in connection with the winding up of the business or the disposition of the assets of the Partnership.
(e) Any and all notices required pursuant to this Agreement shall be delivered to the Parties and any other necessary individuals at their respective addresses listed above.
2. Assets
The Parties acknowledge and agree that approximately [Value] in cash, real property, personal property, and [Assets] will be transferred to [Party/Parties].
3. Debts
Upon the dissolution of the Partnership , the Parties are responsible for the payment of the debts and obligations of the Partnership to the extent of their respective capital contributions.
4. Fixing of Accounts
(a) As soon as is reasonably possible after the Effective Date, a full accounting shall be made to determine the assets and liabilities of the Partnership.
(b) A valuation of the Partnership and the assets shall be made by a certified professional valuator, selected and mutually agreed upon by the Parties.
(c) Any Partner whose Loan amounts and commitment amounts of liabilities are in excess of their respective capital contributions shall contribute additional capital in order to satisfy the Partnership debt.
5. Final Accounting
Within a period of sixty (60) days from the date of this Agreement, a final accounting shall be rendered by both the Partnership Partners and one or more certified public accountants; provided that all necessary and appropriate entries have been made and that such final accounting takes into account in a reasonable fashion the outstanding debts, liabilities, and credits with respect to each of the Partners.
6. Release of Rights
(a) Subject to the terms of 6(b), the Parties hereto hereby release and discharge each other from all existing or future claims, demands, actions, and liabilities arising the relationship as Partners of the Partnership.
(b) The above release shall not apply to any claim or action for specific performance by any of the Parties arising from any circumstance or event which occurred prior to the date of this Agreement.
7. Indemnification
Each of the Parties shall hold the other harmless from any and all claims, actions, and liabilities to Partnership creditors or to third parties as a result of withdrawals by any Party to accounts with the Partnership without the knowledge of the other Party, from misapplication or mishandling of funds by any Party to the Partnership; or any breach of the Partnership agreements.
8. Binding Effect
This Agreement shall inure to the benefit of and shall be binding upon the Parties hereto and their respective heirs, legal representatives, successors, and assigns.
IN WITNESS WHEREOF, each of the Parties has executed this Partnership Dissolution Agreement as of the day and year first above written.
