Thinking of Breaking Your Business Partnership?

Maybe it didn't turn out as expected. Perhaps you can't stand the sight of your partner. Or you've just had enough and want to retire. Whatever the reason, leaving a business partnership is not as simple as strolling out the door with a cheerful wave goodbye.

Breaking a partnership is a big move, and if done the wrong way it can lead to financial penalties and other negative outcomes. Even with the best intentions you can get into trouble if you don't understand your responsibilities to the business you're leaving. This is when you need to look at the partnership agreement - that little (or long) list of things you gave the thumbs up to before starting your business journey.

Formally winding up a partnership is often a tiresome process, involving tasks like liability calculation and asset division. To avoid disrupting a continuing business, many partnership agreements have a condition where if you choose to leave, the other partners will have an opportunity to purchase your interest in the business at a valuation. Even if it’s not in the partnership agreement, it may be an option worth pursuing.

Essentially, business partners are legally obliged to do the right thing by each other. Even if you leave a partnership you can still owe "loyalty" to the business. For example, you might think it’d be a great idea to leave your cupcake company and set up your own bakery using a trademark recipe from the cupcake business. Unfortunately, you may end up having to pay compensation to your old cupcake associates for the privilege.

And sometimes breaking a partnership won’t solve the problem which made you want to leave. For example, if it’s because you want to escape a debt or obligation, you may not realise you could still be on the hook for liabilities.

Yes, there can be many pitfalls with breaking a partnership. Getting advice from a reputable law firm can help smooth the way through what can be a complicated, stressful affair. Everyone has their own set of unique circumstances, and legal advice can clear up things you’re unsure about, or reveal problems you weren’t aware of. Getting a bigger picture can help you decide what is best for your situation. PMF Legal can help you make decisions that are right for you.