Embarking on a new business venture is exciting, especially with a partner who shares your dreams and vision of success. While many partnerships are already built on mutual trust and respect, not all business partnerships will stand the test of time. Some circumstances may arise that can result in business partners deciding to dissolve a partnership. However, partnership dissolution is a complex and sensitive process that requires careful navigation.
This blog post will explore various considerations and steps business partners should take when contemplating a split. From legal obligations to documentation requirements, this blog will provide a roadmap that helps partners navigate the intricate terrain of partnership dissolution, fostering a fair and transparent process that supports both parties’ interests.
A business partnership in Ontario consists of two or more individuals who have created a business relationship. However, with any relationship, partners will not always agree on how to move forward together, and there may come a time when they decide to split. Some common reasons for partnership dissolution include the following:
- Broken communication;
- Differing priorities;
- Incompatible working styles;
- Disagreements over critical business decisions; or
- All partners decide to move on from the business.
After building a business together, the decision to split from a business partner can be difficult, regardless of whether it is a mutual decision or a bitter battle over the partnership ownership and assets. Consulting with a knowledgeable corporate lawyer can help you determine the best course of action to proceed through the process easily.
When a partnership dissolution is on the horizon, partners must consider several factors, some of which are outlined in further detail below.
Ontario’s Partnerships Act governs most business partnerships. That Act states that subject to any partnership agreement, a partnership is dissolved:
- If the partnership was for a limited term, upon the expiration of that term;
- If the partnership was entered into for a “single adventure or undertaking” (i.e. a single, particular project), the termination of that adventure or undertaking;
- If the partnership was entered into for an undefined time, by a partner giving notice to the other partners of their intention to dissolve the partnership (in which case the dissolution is effective from the date of notice or a particular date specified in the notice);
- Upon the death or insolvency of a partner, unless the partnership agreement specifies otherwise;
- If the partnership is operating illegally; or
- By court order under section 35 of the Partnerships Act.
The Partnerships Act also provides, under section 38, that each partner retains their authority and obligations as a partner despite the dissolution, insofar as it is necessary to wind down the partnership’s affairs.
Limited partnerships fall within the Limited Partnerships Act, which contains dissolution provisions similar to those under the Partnerships Act. Section 21 of the Limited Partnerships Act states that a limited partnership is dissolved if a general partner retires, dies, or becomes incapable of managing property (within the meaning of the Substitute Decisions Act). If the general partner is a corporation and that corporation dissolves, the limited partnership also dissolves, unless the remaining general partners have a right to continue the business under the partnership agreement and all consent. If the partnership is dissolving, it must file a declaration of dissolution and settle the business’s accounts and liabilities per the Limited Partnerships Act.
When partners initially enter into business together, there are often various formal documents and agreements (such as a partnership agreement) that pave the way for the future of the business and contemplate what will happen if the partnership dissolves. However, if these agreements were not adequately prepared or did not contemplate what occurs when partners split, it is essential to consult with a knowledgeable business lawyer who can help explore amicable resolutions for all involved.
A comprehensive partnership agreement should detail the partners’ rights, responsibilities, contributions, management structure, decision-making authority, and allocations of profits and losses. They should also set out various steps to take in the event of the partnership breakdown. To ensure all parties are on the same page, the creation of a dissolution agreement (or dissolution of partnership agreement) can ensure that the terms and conditions under which a partnership or corporate entity is dissolved can help provide a framework under which the partners can work under until the split has been completed.
In some instances where one partner becomes incapacitated, dies, or wishes to leave, the remaining partners may continue on in accordance with the terms set out in their partnership agreement regarding buyouts, replacement of the partner, and changes in duties between the remaining partners.
Having an accurate idea of what your business is worth can be a significant factor in deciding what course of action to pursue when splitting from your business partner. Therefore, obtaining a business valuation from an independent third-party company is essential in the partnership dissolution journey. After you understand your company’s worth, it can be easier to contemplate future scenarios and other factors.
Several options may be available depending on the circumstances when deciding what to do with your business.
For instance, if all business partners wish to leave the business, partners can take steps to sell their shares and assets, settle any business debts, and divide and share the remaining funds, allowing all parties to go on their separate paths.
Alternatively, if one partner wishes to retain ownership of the business on their own, additional considerations and steps will need to be taken, particularly if there is an uneven divide of shares within the company. For example, if you are looking to leave the business behind, it is vital to ensure that an arrangement is in place that outlines how you will be properly compensated, regardless of the business’s financial state after you leave. In most cases, because paying a large lump sum is not always feasible, it is beneficial to have your corporate lawyer prepare a formal written agreement to ensure you receive the compensation you are entitled to.
When it comes time to dissolve the partnership, it will remain intact for a limited time to allow time to wind up the business and complete the following steps.
This process involves several steps, including completing current contracts, paying off final debts, filing final tax returns and obtaining a clearance certificate, and selling assets. In most cases, every partner has a right to participate in these steps towards partnership dissolution. Further, the corporation (if applicable) must also file a Notice of Intent to Dissolve the business with the Ontario government.
Once the business’s assets have been sold and all outstanding debts have been settled, any remaining assets and funds can be distributed among the partners and shareholders per their ownership shares.
Once accounts have been settled and distributions have been made, any final documentation may be filed with the appropriate authorities to complete the dissolution process.
All partners should prepare a priority list of items to resolve before a partner leaves or the partnership ends. While partners are encouraged to compromise on issues that are not collectively agreed upon, exploring alternative dispute resolution, such as mediation with a neutral third-party facilitator, can save time and cost while maintaining amicable relationships.
Whether you can see warning signs of a breakup or are involved in dissolution talks with your partners, breaking up a grounded partnership can be challenging. Navigating a plethora of emotions, business decisions, financial implications, and legal considerations can be overwhelming, particularly if there is conflict between partners. Therefore, having a trusted business lawyer help walk you through every stage of the dissolution process and assist in completing the necessary paperwork can ensure no stone is left unturned. They can also help prepare a dissolution agreement to ensure that all parties understand the steps and processes that must be taken to achieve dissolution. If a partnership does turn sour, parties will remain bound by the terms and conditions already agreed to.
The Business Lawyers at Willis Business Law in Windsor-Essex Provide Trusted Advice on Business Creation and Dissolution
Every partnership split is different. Whether you are currently in talks with a business partner about a split or just want to be prepared for the unknowns of the future, the trusted business lawyers at Willis Business Law can help you navigate the complex path of partnership dissolution in Ontario. From explaining your legal rights to finalizing the dissolution of a partnership, our lawyers are ready to help. To learn more about how we can help you exit a partnership, contact us by phone at 519-945-5470 or contact us online to schedule an initial consultation.