Author
Domenic CalabrettaChief Executive Officer & ASIC Registered Liquidator
A business partnership can break down for a number of reasons, but knowing what to do next, including your legal and financial obligations, is important. If you’re looking to dissolve your business partnership, here’s everything you need to know.
What is a dissolution of partnership?
The termination of a partnership is referred to as a ‘dissolution’ and the process of partnership dissolution varies depending on whether you have a partnership agreement in place. If no formal agreement exists, the procedure for dissolution will be governed by the Partnership Act in the state or territory where the business was established.
Reasons to dissolve a partnership
A business partnership can dissolve for a number of different reasons. Some of the most common reasons for ending a partnership include:
- The partnership term expires
- A partner wants to leave
- The partnership becomes illegal
- A partner dies
- A partner becomes bankrupt
- The business becomes insolvent
- The court dissolves the partnership due to an incapacity or unsoundness of mind in the partners
- The project for which the partnership was created ends
How to dissolve a partnership in Australia
If the term of the partnership has expired, the partnership will automatically end at that date. The same goes for situations where a partner has died, become bankrupt, or the partnership becomes illegal. If a partnership is to be dissolved due to unsoundness of mind in a partner, the other partners must apply for a court order to dissolve the partnership, which requires a formal declaration that the person is unsound of mind.
On the other hand, a partnership set up for an indefinite period of time grants partners the ability to resign at any time they wish so long as written notice is given. If a partner is choosing to leave a business, they must give written notice of their intention to all other partners, and specify the date they wish to leave. The resignation of that partner triggers the dissolution.
Once the notice has been sent to all partners, it will be published in the Government Gazette and a local newspaper, alerting the broader public of the dissolution and protecting the partner from creditors who continue business with the other partners.
Dissolving a partnership with an agreement
When forming a new business, if you created a formal contract governing the relationship between yourself and the other partners, then you have a partnership agreement.
A partnership agreement outlines the terms according to which the partnership is carried out and will generally include details such as:
- The business structure and operations.
- The term of the partnership.
- How accounts are managed.
- Terms for terminating the partnership.
- Selling of property
Therefore, if you have a partnership agreement, the terms relating to termination will help govern the procedure to be undertaken in order to dissolve the partnership. Of course, the dissolution of the partnership will still be subject to the legislation governing the state you formed the partnership in, for example, the Partnerships Act 1892 (NSW).
Even with an agreement in place, legal and financial advice is recommended to assist you through the dissolution process and ensure compliance with relevant laws.
Each state and territory in Australia has its own governing legislation for the dissolution of a partnership:
- Partnership Act 1963 (ACT)
- Partnership Act 1892 (NSW)
- Partnership Act 1997 (NT)
- Partnership Act 1891 (QLD)
- Partnership Act 1891 (SA)
- Partnership Act 1891 (TAS)
- Partnership Act 1958 (VIC)
- Partnership Act 1895 (WA)
Dissolving a partnership without an agreement
If there is no partnership agreement, or the contract is silent on the matter of termination, the governing law of the state or territory will apply. For example, the Partnership Act 1892 (NSW), states that partners may dissolve a partnership:
- By the term of the agreement expiring; or
- If no specific term or date is included, then by one partner giving notice to the other of their intention to dissolve the partnership.
Notice must be given in writing, including the date from which they wish to terminate. If no date is specified, the partnership will dissolve immediately.
The legal and financial implications of dissolving a partnership
Handling debts and liabilities
Even after dissolving a partnership, there may still be debts to take care of. Under section 9 of the Partnership Act 1982 (NSW)¹, each partner is jointly liable for all business debts incurred while they were a partner of the business. It’s important to:
- Settle any remaining debts.
- Ensure all tax obligations are met.
- Close business accounts and cancel registrations.
Tax implications of dissolving a partnership
There are several tax implications of dissolving a partnership, including:
- Lodging a final partnership tax return.
- Cancelling GST registration if applicable.
- Finalising superannuation payments for employees.
Consulting an accountant can help ensure compliance with Australian tax laws.
Closing the business after dissolving a partnership
If the dissolution of the partnership means that the business will end, the company will need to be deregistered with the Australian Securities and Investments Commission² (ASIC). To deregister your company, the following criteria3 must be complied with:
- All company members agree to deregister
- Trading has ceased
- The assets of the company are worth less than $1,000
- There are no outstanding liabilities
- The company is not involved in legal proceedings
- There are no outstanding fees and penalties under the Corporations Act 2001
Before deregistering you will also need to ensure you have completed your final tax return, cancelled your GST registration and finalised your superannuation payments for your staff.
References:
https://legislation.nsw.gov.au/view/whole/html/inforce/current/act-1892-012
https://asic.gov.au/for-business/closing-your-company/deregistration/
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