Best Way to End a Business Partnership - Make a Plan

Creating a Dissolution Plan Can Save Money and Hassle

unhappy looking businessmen
••• Shannon Fagan/Getty Images

Breakups are tough. And nowhere are they tougher than with business partnerships. It's like a divorce with additional complications. And most of those are financial. You may not be able to salvage the personal relationship, but you can save yourself some money and hassle as you end your business partnership. 

You want this partnership breakup to go as smoothly as possible, for financial and personal reasons. Setting up a plan will help.

First, consider your ultimate goal with this change, and second, consider making a plan — it's called a dissolution plan or liquidation plan. 

The suggestions in this article would apply to a partnership business entity or to an LLC with several owners (called "members"), which is is set up in a similar way. If you are in a small corporation or S corporation with only a few owners, this article might apply to you too. 

Before You Decide to Close the Doors...

Dissolution — closing the doors of a business — should always be the last resort. Before you make a final decision to end the partnership, consider these questions: 

What Does Your Partnership Agreement Say?

When you started the partnership, did you create a written partnership agreement, prepared by a competent attorney? It should include specifics about how to end the partnership or how to continue with changes to the status of one or more partners? 

Having a written partnership agreement in place makes changes easier, and you may decide it's worth it to continue. Without an agreement, closing will take longer and be more expensive. 

If there is no partnership agreement, the partners will need to be able to work together to find common agreement. Having a difficult partner may be the reason you are dissolving the partnership, but you'll have to find a way to get through it.

You might want to consider mediation in this situation before you resort to costly litigation. 

Questions to Ask Yourself Before You Close Your Business

What Is the Partnership Type? What Type of Partner Is the Person Leaving? 

The type of partnership and the status of the partner who is leaving can make all the difference in what happens to the partnership and if it can survive. If the partner has a majority controlling share, the partnership may not be able to survive unless the other partners can do a buyout. 

Can the Partnership Continue? 

If one partner is leaving the business, you might be able to continue by buying out that individual. That assumes you want to continue with other partners and that the partnership agreement allows it. 

Only One Owner Left? A Special Situation

If only one partner remains and wants to continue the business, check with an attorney about how to change the legal status of the business. 

Can the Business Be Sold?

Selling the partnership might be another alternative to closing. The partner (or partners) leaving the business will probably have to be bought out of their share of the business before the sale. 

What Is Your Ultimate Personal Goal for Yourself and the Partnership? 

Consider your personal situation and whether the partnership is what you want after the other person leaves. 

Creating a Dissolution Plan

If you have finally decided to end the partnership, and even if you have a partnership agreement, you will need a plan for the process of dissolution. The SBA says a dissolution plan should begin with a review of the state of your business.

What to Include in Your Dissolution Plan

You'll need a timeline for what will happen when, up through the formal dissolution and final tax return.

Prepare a written agreement to close, following your partnership agreement.

File dissolution documents with your state iso you don't continue to be charged for franchise taxes and other business taxes.

The IRS has a list of steps to take when closing your business. It includes information about income taxes, employment taxes, and payments to others. It also describes how to cancel your Employer ID Number and what records to keep.

Get an independent valuation of the business to avoid disagreements.

Payments that need to be made and who must make them. This includes attorneys, state and federal taxing agencies. 

Talk to lenders, including the SBA, about how to repay outstanding business loans.

Taxes for the year of the liquidation must be reported and paid. You will need to file:

  • A final partnership tax return (IRS Form 1065)
  • Schedule K-1s for all partners for their share of distributions for the year
  • Schedule (Form 1065) for capital gains and losses

You may also need to file:

  • Form 4707, Sales of Business Property
  • Form 8594 Asset Acquisition Statement for selling business assets

Don't forget to file state and local tax forms, including income tax, sales taxes, excise taxes.

If you have employees, you must comply with federal and state labor laws about layoffs and plant closings.

Plans for notification of all stakeholders, including employees, contractors, vendors, and, of course, customers. As is the case with all major business changes, it's important to preserve the goodwill of the business (even if it's being dissolved). Add these decisions to your dissolution plan. 

Yes, ending a business is like ending a marriage, but it can go more smoothly if you decide on the ultimate goal at the beginning of the process and you use a detailed plan to get to your end result. 

One Final Tip: Get an Attorney and a CPA

You'll need both an attorney (for legal documents) and a CPA (for financial statements, buy-outs, etc.) to help you navigate this process and come out the other side.

Article Sources

  1. U.S. Small Business Administration. "Close or Sell Your Business." Accessed Oct. 20, 2020.

  2. IRS. "Closing a Partnership." Accessed Oct. 20, 2020.