It used to be that when a partner planned on leaving a partnership, the business would be dissolved and all of the partners would go their own way or be forced to reorganize without the partner. However, innovation in the law now allows partners to be bought out by the remaining partners. The law now specifies how to determine the price of the partner’s interest and how the rest of the partners should proceed after the buyout.
A partnership is an organization composed of two or more members who are operating together for profit. The two main characteristics of this organization relate to liabilities and taxation. The partners are each responsible for the debts and liabilities of the organization, including those debts caused by other partners when they do business on the organization’s behalf. Also, each individual partner is taxed annually on the income and losses that the partnership incurs. Each partners' share in the company's income is determined by the amount he invests in the business. All partnerships operate and are organized following state regulations. The Revised Uniform Partnership Act (RUPA) is the most current basis for partnership organization, and has been adopted by 35 states. To understand partnership rules in general, this is the best resource to use.
When a partner wishes to leave the partnership, one of two things can occur. The first is that the business dissolves, which means that the businesses assets are divided amongst the members and everyone goes their separate way. However, if the business plans to continue without the departing member, she can dissociate from the partnership and the organization can then repurchase her interest in the company.
When a dissociated partner is bought out, the buyout price is equal to the value of the partner’s interest if all of the partnership’s property was sold at the date of the partner’s departure and the entire business was wound up. As part of the winding up process would include settling the partnership’s debts, the departing partner’s share of the partnership’s liabilities would be deducted from his share of the proceeds from the partnership property. After settling the price and the departure of the partner, the remainder of the partnership’s assets and liabilities are divided amongst the rest of the partners.
While there are general rules regarding partnerships that remain relatively consistent, each state has its own special requirements which must be met. As a result, it's wise to consult with an attorney licensed where the partnership is organized to ensure that transfers comply with state regulations. In addition, there are tax repercussions to partners who transfer their partnership interests, so partners should also consult with a Certified Public Accountant (CPA) after the transfer to ensure personal tax compliance.
- USLegal: Partnerships Law & Legal Definition
- Penn Law; Uniform Partnership Act (1997)
- Uniform Law Commission. "Summary: The Uniform Limited Partnership Act (2001)," Pages 1 & 2. Accessed Dec. 3, 2019.
- Magan Causey. "Limited Liability for General Partnerships: Another Louisiana Anomoly?," Page 10. Louisiana Law Review, 2006.
- U.S. Small Business Administration. "Apply for Licenses and Permits." Accessed Dec. 3, 2019.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.