1. Default Unified Partnership Act (UPA) terms and conditions.
In the absence of a partnership agreement providing something different, the “default” provisions of Articles 6, 7 and 8 of the Unified Partnership Act (UPA) will apply. This means a barebones general partnership agreement will be fleshed out or supplemented by terms and provisions provided by the statutes, provided by the Unified Partnership Act.
A partner of a general partnership that doesn’t have a specific duration or project to be accomplished has the right to say to the partnership, in effect, “I am leaving this partnership, effective now.” Or, “… effective at x date in the future.” This is called “dissociation”. That statute says as to this single most common situation simply this:
“A partner is dissociated from a partnership upon the occurrence of any of the following events: (1) The partnership’s having notice of the partner’s express will to withdraw as a partner [immediately] or on a later date specified by the partner.”
What if you were say to your partners:
“I am just so frustrated by working so hard and still losing money, frustrated by you and the other partners making all the decisions without even listening to what I have to say. I am just done with this. Done. I am out of here! Do you hear me?”
Would this constitute “dissociation”?
Could well be that this little venting would legally constitute “dissociation”. Or not.
So a few words to the wise: If you want to dissociate, make sure you track the language of the statute and reference the statute.
If you don’t know about dissociation or are not sure you want to dissociate, get legal counsel and be very careful what you say to your partner(s) or you might just find yourself dissociated before you want that to happen.
3. Wrongful dissociation.
If the general partnership has a specific duration (say a general partnership that by agreement is to last 5 years) or project (accomplish building a private road), partners can still dissociate prematurely, but the dissociation will be “wrongful” and financial consequences can occur. An example would be a general partnership between two general building contractors to build a spec home. Half way through the project, one of the partners dissociates. That would be a wrongful dissociation.
Here is what California’s UPA statute says, along with my added bolded font comments in brackets [ ]:
“(a) A partner has the power
to dissociate at any time, rightfully or wrongfully, by express will pursuant to paragraph (1) of Section 16601.
(b) A partner’s dissociation is wrongful only if any of the following apply:
(1) It is in breach of an express provision of the partnership agreement.
(2) In the case of a partnership for a definite term or particular undertaking, before the expiration of the term or the completion of the undertaking if any of the following [specific examples expressly provided in the statute] apply ….
(c) A partner who wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation. The liability is in addition to any other obligation of the partner to the general partnership or to the other partners.
Corp. Code, § 16602 (emphasis supplied).
4. Buyout for fewer than half of the partners dissociating.
If fewer than half of the partners dissociate, there is a “buyout” process set forth in the UPA by which the departing partner(s) receive value for the(ir) partnership interest(s) through a buyout of their interests. If there are two partners and one dissociates, then the buyout process does not apply. Likewise, if there are three (3) or more partners, and fewer than half dissociates, then the buyout process does apply.
5. Half or more partners dissociate then “dissolution” occurs.
If half or more than half of the partners dissociate, then the general partnership is dissolved—is in “dissolution”—and the partnership’s business is “wound up” in a reasonable period of time. Winding up can include piecemeal liquidation of assets or, either expressly or impliedly by Unified Partnership Act, sale of the business as a going concern—this would be a sale of all of the general partnership’s assets.
Unified Partnership Act section 16803 provides:
(c) A person winding up a general partnership’s business may preserve the general partnership business or property as a going concern for a reasonable time, prosecute and defend actions and proceedings, whether civil, criminal, or administrative, settle and close the general partnership’s business, dispose of and transfer the partnership’s property, discharge the partnership’s liabilities, distribute the assets of the general partnership pursuant to Section 16807, settle disputes by mediation or arbitration, and perform other necessary acts.
6. Value for departing partners—assuming there is positive value.
In all events, the former partners receive value for their partnership interests. Assuming there is left over value (positive value) when the general partnership’s creditors are paid and the partners’ accounts are reconciled, then the departing partner(s) would be paid that positive value in proportion to the general partnership interest.
7. What Happens If There is Negative Value?
If the value is “negative value”—meaning liability for pre-and possibly post- dissociation partnership liabilities and legal obligations—the partner would then need to make a new capital contribution to the partnership.
If there is no excess value—say the partnership has negative value, then partner(s) remain individually liable to pay those liabilities.
Here again UPA steps up to supply substance. Section 16807 provides in part:
(a) In winding up a general partnership’s business, the assets of the general partnership, including the contributions of the partners required by this section, shall be applied to discharge its obligations to creditors, including, to the extent permitted by law, partners who are creditors.
Any surplus shall be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions under subdivision (b).
(b) Each partner is entitled to a settlement of all general partnership accounts upon winding up the partnership business. In settling accounts among the partners, the profits and losses that result from the liquidation of the partnership assets shall be credited and charged to the partners’ accounts. The general partnership shall make a distribution to a partner in an amount equal to any excess of the credits over the charges in the partner’s account.
Except for registered limited liability partnerships and foreign limited liability partnerships, a partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partner’s account.
(c) If a partner fails to contribute the full amount that the partner is obligated to contribute under subdivision (b), all of the other partners shall contribute, in the proportions in which those partners share general partnership losses, the additional amount necessary to satisfy the partnership obligations for which they are liable under Section 16306. A partner or partner’s legal representative may recover from the other partners any contributions the partner makes to the extent the amount contributed exceeds that partner’s share of the partnership obligations for which the partner is personally liable under Section 16306.
Check in next week for Part 3 of this Series on Business Divorces in General Partnerships: Beware of these 2 Key Consequences When Considering Dissociation.
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