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SMART ANSWERS
By Karen E. Klein

10.5.99  
Cutting the Partnership Knot
Tie up all the loose ends when dissolving a business

Q: I was wondering if you knew of a site on the Web where I could get help on dissolving a partnership?
-- P.J.R., Pasadena, Calif.

A: You can visit the Web site of the California Secretary of State at www.ss.ca.gov and click on "business programs" and "general partnerships" to get helpful information and downloadable forms for dissolving businesses registered in California. The statement of dissolution may be downloaded and filed free of charge. Print out the form, fill it out (instructions are available on the site), and have all the parties sign it. Then mail the original documents back to the Secretary of State's office in Sacramento.

Partnerships dissolve as part of the natural progression of a business. They can occur as a result of retirement, disputes, and other circumstances, and oftentimes the business continues in one form or another. Sometimes a growing business that began as a general partnership will dissolve in favor of incorporation or limited partnership so that the partners can take advantage of the protection from liability that those structures provide.

In a general partnership, every partner is personally liable for debts incurred by the others on behalf of the partnership, so it's important to wind up a partnership according to Hoyle. "The dissolution is the process by which the world is put on notice that one or several partners are not responsible for the debts and liabilities of the others anymore," says Jeffrey A. Unger, a Beverly Hills business and real estate lawyer. As soon as the partnership is dissolved, file the statement of dissolution, Unger says. The California Corporations Code provides that 90 days after the statement is filed, third parties are considered to have knowledge that no partner has authority to enter into binding transactions on behalf of the partnership other than to wrap up the business.

"You should also send out actual notice to the people you do business with -- your customers, your suppliers, your clients -- in the form of a nice letter or card announcing the dissolution," Unger recommends. Typically, the partner who initiates the dissolution is the one responsible for sending the notice, or -- if the company is going to continue in another form -- the new entity would announce the dissolution and the new company name, if applicable.

You should examine contracts, leases, and loan agreements to see if the dissolution will affect them. Sometimes these become null and void if the partnership dissolves. Or they may state that none of the partners can drop out of the deal during the contract period. If you neglect post-dissolution procedures, such as negotiating new terms with a bank or landlord, a former partner with deep pockets could get a major shock in the form of a lawsuit if the remaining partners default, Unger says.

There are no special tax consequences when a general partnership dissolves unless the partnership owns property that has appreciated. Still, you should consider consulting a lawyer if your business has been significant or has potential liability issues: "It's possible to incorporate and dissolve a partnership without involving an attorney, but if the company is going to continue and grow in the future, this might be a good opportunity to establish a relationship with an attorney who specializes in small business," says Peter Cowen, an investment banker and strategic planner based in Westwood, Calif. "A business attorney is more than just someone who fills out paperwork for a growing company. A good small-business attorney will facilitate connections for your company, provide resources, and help you sort out your strategy."

For more information, contact the General Partnership Unit of the California Secretary of State's office at (916) 653-3365.


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