When a business partnership ends, dissolution begins the process of winding up affairs and distributing assets. Dissolution doesn't mean immediate termination—the partnership continues to exist for purposes of completing pending business, paying debts, and distributing remaining assets to partners. How dissolution occurs significantly affects what partners ultimately receive.

Understanding dissolution helps partners navigate the end-of-relationship process and protect their interests during wind-up.

Events Triggering Dissolution

Dissolution can occur through various events. Partners may unanimously agree to dissolve. The partnership agreement may specify events triggering dissolution—such as a partner's death, withdrawal, or bankruptcy. A fixed-term partnership dissolves when its term expires.

Any partner in an at-will partnership can generally cause dissolution by expressing their will to withdraw. However, this may make them liable for damages if dissolution is wrongful—violating the partnership agreement or occurring at an inappropriate time.

Courts can order judicial dissolution when partnership purposes become impractical, a partner's conduct makes continuation unreasonable, or other circumstances justify court-ordered dissolution.

Winding Up the Business

Winding up involves completing pending transactions, collecting receivables, liquidating assets, paying debts, and distributing remaining assets to partners. Partners who haven't wrongfully caused dissolution typically have the right to participate in winding up.

During winding up, partners should complete existing contracts but generally shouldn't take on new business. The partnership's authority is limited to activities necessary to wind up, not ordinary ongoing operations.

Asset liquidation should maximize value. Forced sales under time pressure typically yield less than orderly marketing. If one partner wants to continue operations and can buy out others, that often produces better results than selling everything to third parties.

Paying Debts and Distributing Assets

Partnership debts must be paid before partners receive distributions. Creditors have priority over partners. If liabilities exceed assets, partners may be personally liable for the shortfall depending on partnership type.

In general partnerships, partners have unlimited personal liability for partnership debts. Limited partners in limited partnerships and members in LLCs typically have liability limited to their investment, though exceptions exist.

After creditors are paid, remaining assets are distributed to partners according to their ownership percentages or as specified in the partnership agreement. If the agreement is silent, state default rules govern distribution.

Accounting and Final Settlement

Dissolution typically requires a final accounting to determine each partner's share. This involves valuing assets, calculating liabilities, determining each partner's capital account balance, and computing their distribution.

Partners are entitled to accurate accounting of partnership affairs. If you suspect manipulation or concealment, you may need forensic accountants to examine the books and independent appraisers to value assets.

Settlement agreements formalizing distributions, releases, and final terms help conclude the relationship cleanly. Documenting the final settlement protects against later claims.

Continuing the Business

Dissolution doesn't always mean liquidating and ending the business. Partnership agreements often provide for continuation by remaining partners when one partner leaves. This is typically preferable—preserving going concern value rather than liquidation value.

If one group can continue the business while buying out departing partners, everyone often does better than in liquidation. The continuing partners keep a functioning business; the departing partners receive buyout payments reflecting going concern value.

Continuation requires either agreement among partners or provisions in the partnership agreement authorizing it. Without such provisions, any partner might insist on full liquidation.

Disputes During Dissolution

Dissolution often brings latent conflicts to the surface. Partners may dispute valuation, management during winding up, allocation of specific assets, or responsibility for debts. Old grievances may manifest in arguments about wind-up details.

Mediation can help resolve dissolution disputes without expensive litigation. When partners cannot agree on fundamental issues, court intervention may be necessary—courts can appoint receivers to manage dissolution, order accountings, and resolve disputes.

Protecting Your Interests

During dissolution, protect yourself by staying involved in the process—don't let other partners control wind-up alone. Review all financial transactions and asset dispositions. Ensure valuations are fair and sales are at arm's length prices.

Get releases and indemnities as part of final settlement. You don't want claims arising years later from partnership activities or debts.

Getting Legal Help

Dissolution involves legal, financial, and tax complexities. A business attorney helps you understand your rights and obligations, negotiate fair settlements, ensure proper winding up, and protect yourself from future claims. Whether dissolution is amicable or contentious, professional guidance helps achieve better outcomes and cleaner separations. Don't navigate this process without understanding your rights and risks.