A common term for dissolving a business partnership is “business divorce.” It’s called a divorce because, in many ways, business partnerships are like a marriage. Partners are bound together both legally and emotionally, and a split can be as difficult or easy as the partners decide to make it.
While it’s not always easy (or practical), the goal is to avoid litigation over your business divorce. Depending on whether your business entity operates as a partnership, limited partnership, or corporation, there are different paths to dissolving a business partnership.
Dissolving a partnership or limited partnership
Your partnership agreement should detail the process of ending your business relationship with your partner or partners. If you did not execute a partnership agreement or it fails to include provisions for dissolving the partnership, you must use the default provisions as outlined in the Uniform Partnership Act.
A well-crafted agreement serves as a guide for dispute resolution and how to dissolve the partnership. It may require an official vote or written permission from all partners to dissolve the partnership as well as other requirements. It is important to follow the dissolution provisions in the agreement to avoid litigation.
As part of the partnership dissolution process, Arizona law requires that all debts be paid. If the partnership lacks sufficient liquidity to deal with these debts, you may need to sell company assets to satisfy the debts. Once all debts are paid, any remaining assets may be distributed between the partners per your agreement.
You should also consult with a tax professional about the tax consequences of asset distribution as well as other “winding down” activities that require IRS notification.
Finally, although not required by Arizona law, you should file a Statement of Dissolution with the Arizona Secretary of State. This will protect you against any potential future liability if any of your partners decide to continue to operate the business.
Dissolving a corporation
Providing that the corporation has not issued any shares or commenced doing business, it can be dissolved by a simple majority of owners by filing Articles of Dissolution with the Arizona Corporation Commission.
If the corporation has shareholders and is currently doing business, things become more complicated. Each shareholder must be notified by the Board of Directors of the intent to dissolve the corporation. A vote must then be taken at a meeting of the shareholders. Usually, a majority vote is sufficient unless the articles of incorporation or the Board dictates otherwise.
The corporation must then publish the Article of Dissolution and pay the necessary fees. The corporation then goes about the “winding down” process — paying debts, collecting monies owed, informing employees and customers, and distributing any remaining assets to shareholders. During this time, the corporation only operates to the extent necessary to wind down the business.
It is important to have qualified legal counsel engaged early in the game in case partnership disputes arise during the dissolution process.
Williams Mestaz, L.L.P., has the experience and reputation that you want when you are dealing with a business-related lawsuit. We are here to obtain the best possible outcome for your situation. Do not hesitate to contact Williams Mestaz, L.L.P., at (602) 256-9400, and see how we can help you resolve your legal matter.