The withdrawal of a partner from a business is a commonly overlooked issue, yet one which everyone should think through when they first decide to go into business together. Failing to address this critical issue at the outset can result in unnecessary conflict and even costly litigation later. Business partners decide to leave businesses for many reasons: They may not be committed to the business, the business may not be as successful as envisioned, they may discover a new venture they would like to pursue, or they may decide they want to retire. As part of deciding to go into business together, partners should decide what will happen if one of them leaves the partnership. Then they should make sure that whatever they decide is accurately reflected in their partnership agreement. This will help ensure a smooth and orderly transition for both partners when one is ready to exit the partnership.
Check your Partnership Agreement
If you and one or more other people own and run a business together and you have not formed a corporation or limited liability company, then you have a general partnership. While not required, most business partners enter into written agreements that spell out the parties’ rights and responsibilities, including what happens if one person wants to leave the business.
One of the noteworthy characteristics of general partnership law is the extent to which the partners may establish their own rules for governance and the operation of the partnership. Except in certain circumstances, partners can agree to terms governing their relationship and the partnership that are different from what is provided under state law. In general, state statutes governing partnerships are used to fill in the gaps where the partnership agreement is otherwise silent or serve as default rules in the absence of a partnership agreement. Therefore, the terms of your partnership agreement will govern the relationship between you and your partners, including what happens if one partner decides to withdraw from the partnership.
Most partnership agreements include provisions that cover the basic issues that arise when one partner decides to withdraw, such as:
- Do the remaining partner or partners have a right of first refusal to buy the partnership interest?
- How will the purchase price for the partnership interest be determined?
- What if there are no buyers for the partnership interest?
- What happens to the partnership business when the partner leaves?
If you have a partnership agreement and it includes provisions about partner withdrawal, then those are the rules you should look to when a partner decides to leave the partnership. To the extent an issue is not addressed in your agreement, your state’s partnership law will govern. Those rules will apply by default to the extent necessary to fill in terms that are not covered in your agreement.
Statutes Governing Partnerships
The modern sources of general partnership law are the Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA). Every state except for Louisiana has adopted either the UPA or the RUPA with approximately 37 states adopting the RUPA (or a variation of it). Under both the UPA and RUPA, a partner has the right to withdraw from the partnership at any time, provided proper notice (if required) is given.
However, the UPA and RUPA have different rules about what happens to the partnership itself when a partner withdraws. Under the UPA, the withdrawal of a partner from the partnership automatically causes a dissolution (a break-up) of the partnership.
One of the major reforms introduced with RUPA was to allow a partner to withdraw from the partnership without automatically causing a dissolution of the partnership. In most cases, under RUPA, a partnership may buy out the interest of a partner who leaves without dissolving the partnership. In addition, a partnership set up for a specific term will not dissolve so long as at least one-half of the partners choose to remain.