A partnership may dissolve for a variety of reasons, including retirement, death of a partner or the decision to operate the business as a different entity, such as a corporation or limited liability company. A written partnership agreement typically sets forth the process for dissolution, such as the requisite consensus for dissolution and the course of action if all the partners have not agreed to dissolve the entity. Although a partnership agreement is not legally required, it is sensible to have one in place to establish the terms of the relationship from the outset. The dissolution of a partnership is governed by state law. The procedures for dissolution in California are:
File a Statement of Dissolution. To terminate the partnership, the partners must file a Statement of Dissolution (GP-4) with the Secretary of State. Once this form is filed, the partnership is no longer considered a going concern for tax purposes. According to the California Corporations Code, 90 days after the Statement of Dissolution is filed, third parties are deemed notified that partners cannot bind the partnership in any transaction (other than transactions to wind up the business).
Inform relevant entities of the dissolution. It is prudent for the partnership to inform parties with whom it has conducted business that the partnership will be terminated. This includes creditors, suppliers, customers and other business associates. The partners can notify these parties if any person will assume the business or there are plans to convert the partnership to another entity. The partners should review all existing agreements to understand how these contracts will be affected by the dissolution.
Publish notice of dissolution. The partnership should publish a legal notice to alert the general population of the intent to dissolve the partnership.
File tax return. The California Franchise Tax Board requires partnerships to file a final tax return and pay outstanding state taxes upon dissolution.
After Form GP-4 has been filed and public notice is properly distributed, the partners may not undertake actions on behalf of the partnership as a legal entity. The partners are then no longer accountable for the debts and liabilities of fellow partners. The debtors of the partnership must claim their debts within 90 days. Once the formal dissolution is complete, the partners can form a corporation or limited liability company, if they choose.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.