Partnerships are incredibly common business entities that many Californians enter on a regular basis, often to acquire and develop real estate over many years. But even the most successful arrangements must come to an end. Unfortunately, more often than not, the dissolution procedures “unwind” what may have been a series of cordial and respectful relationships between all involved.
At Underwood Law firm, our attorneys know how tough this situation can be. Thankfully, our attorneys are well-versed in partnership law, and we know the best ways to tackle the disputes that accompany dissolution and winding up. Our team has the legal acumen and skills necessary to help you achieve your litigation goals.
When can a partnership be dissolved?
Technically, a partnership can be dissolved at any time. That said, there are certain circumstances where the law says that the partnership must begin winding up its affairs. The Corporations Code contains an itemized list of scenarios where this is proper. (Corp. Code § 16801.)
The first and most obvious is when the partners want to end their relationship. The rule here varies depending on whether the partnership is “at will” or defined for a specific term or undertaking. An “at will” partnership has no fixed time for its duration, meaning it can end whenever the partners want it to. (Corp. Code § 16101.) For these types of partnerships, all it takes is for at least half of all the partners to want out. (Corp. Code § 16801.)
On the other hand, there are partnerships for definite terms or undertakings. These are partnerships formed to achieve some specific goal or to last for a stated amount of time. Naturally, one way that the partnership can end is if the undertaking is completed or the time limit is reached. But if the partners want to wind up the entity early, then all partners need to agree, not just half. (Corp. Code § 16801.)
There are, however, many other instances where the law mandates a partnership dissolve. For example, a set action or event can occur that the partnership agreement states results in dissolution. Or imagine an ordinance is passed that makes the goods the partnership is making illegal. This, too, mandates an end to the partnership.
Even a single partner can end a partnership, provided they file a special application in court. These applications, though, require the partner to make definite showings in order to be successful. Some common reasons are that it is not reasonably practical to continue carrying on the partnership or that the economic purpose of the partnership is unreasonably frustrated. (Navarro v. Perron (2004) 122 Cal.App.4th 797, 801.)
Can a partnership continue even though it should be dissolved?
Yes, though only in certain situations. Suppose that a partnership is set to last for 20 years so that the partners can invest in and develop a piece of real estate. The 20-year clock is up, so that means the partnership begins winding up, right?
In actuality, the Corporations Code dictates that all of the partners can waive the right to wind up the partnership. (Corp. Code § 16802.) In this event, the partnership resumes carrying on its business as if dissolution never occurred, and any liability incurred by the partnership after dissolution is determined as if the dissolution had not occurred. (Id.)
This situation actually occurs quite frequently. If things are going well, and the partnership is benefitting the partners economically, then there isn’t an incentive to wind up and end the entity’s existence. This waiver, therefore, provides partners with the flexibility to fully take their situations into account.
What is mean to “wind up” a partnership?
Let’s say that the partners don’t want anything to do with a waiver and instead truly want their mutual relationship to end. In that case, the partnership is not technically dissolved yet. It still has to be wound up.
Winding up means settling the accounts and business of the partnership. Typically, this entails liquidating the partnership’s assets and squaring away each partner’s partnership account. It can also mean paying off creditors, transferring any property to third parties or into trust, and discharging the partnership’s liabilities.
While all this is going on, the partnership is still, technically, “alive.” (Corp. Code § 16803.) This is because, in addition to settling the accounts, the partnership has to be able to sue and be sued. Suppose that the partnership engaged in some improper activity while it was active and now is being dissolved due in part to the bad actions of some partners. Those injured parties will want to come collecting, and the partnership needs to be able to account for third-party claims, even if they’re brought after dissolution is started.
Put another way, when a partnership is dissolved, the dissolution “is best understood not as its death, but merely as its retirement from business activities.” (Penasquitos, Inc. v. Superior Court (1991) 53 Cal.3d 1180, 1190.)
Can partners dissociate during a wind up?
Dissociation needs to be distinguished from dissolution. Dissociation refers to when a partner individually leaves the partnership early. There are advantages and disadvantages to this. On the one hand, the Corporations Code provides that when a partner dissociates, this triggers a statutory buyout of their interest in the firm. (Corp. Code § 16701.) That said, dissociation can be “wrongful” in certain instances, and leaving early can result in the withdrawing partner being sued for damages. It’s a risky gamble.
But once a partnership is dissolved, can the partners dissociate to trigger their own buyouts? No. The rule is that if a partner dissociates 90 days or less before dissolution, they are treated as a partner for the purposes of winding up the business. (Corp. Code § 16701.5)
This statute thus prevents partners from racing to get out early in anticipation of dissolution so that they can try to avoid the costs of discharging partnership obligations with partnership assets, including their own individual contributions. Once a dissolution is started, partners cannot simply get out until the entity is completely wound up.
How can the attorneys at Underwood Law Firm assist you?
Winding up a partnership can prove to be a difficult task. Some partners will inevitably wish for the relationship to continue, while others may only be looking out for themselves. In these situations, the right attorney can make all the difference.
As each case is unique, partners would be well-served to seek experienced counsel familiar with partnerships and the winding up procedure. At Underwood Law, our knowledgeable attorneys are here to help. If you are trying to begin dissolution, wondering whether you can fight one off, or if you just have questions, please do not hesitate to contact our office.
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