The Case of the Departing Penultimate Partner
Can one hand clap? There are many disadvantages associated with structuring a business as a general partnership. One disadvantage is that, unlike limited liability companies and corporations, the departure of one of the remaining two owners will, in all likelihood, result in the dissolution of the company and will, in all certainty, create legal and practical challenges. Consider the following…
The general partnership…
A general partnership (“partnership”) is a for-profit business entity that is formed by the mere joining together of the co-owners rather than the filing of a document with a state commercial recording office. Traditionally, general partnerships have been very fragile entities, with many things potentially causing their dissolution. As partnership law evolved, efforts have been made to add stability to partnerships and reduce the number of events that cause their dissolution. Nevertheless, partnership law continues to define a partnership as a business that has “two or more” co-owners (i.e., “partners”). The definition is clear and the concept seems intuitive—a partnership must have at least two partners. So, what happens if a penultimate partner dissociates (i.e., “leaves the partnership”) either involuntarily (e.g., by way of dying) or voluntarily (e.g., by way of withdrawing)?
Death serves to “dissociate” the partner, and the deceased partner’s estate does not automatically take the decedent’s place as a partner. Similarly, the voluntary withdrawal of a partner serves to “dissociate” the partner. Where the partnership has at least two remaining partners after the dissociation, the partnership does not necessarily dissolve, but under partnership law, the partnership is required to buyout the interest of the dissociated partner. However, where it is the penultimate partner who dies or withdraws, courts have held that the buyout provision does not apply because a partnership cannot exist with only one “partner.” Furthermore, courts have reasoned that, insofar as a partnership cannot continue with a single partner, the dissociation of a partner from a two person partnership necessarily triggers dissolution of the partnership. Some legal scholars disagree with this reasoning. However, the drafters of the very influential model “Uniform Partnership Law” appear to concur with the judicial interpretations. Under the most recent version of the model law, it is clear that a partnership is dissolved, and its business must be wound up, if the partnership does not have at least two partners for at least ninety (90) consecutive days.
The departure of a penultimate partner can result in the dissolution of the company or create legal and practical challenges for a general partnership. Proactive partners may, by way of a well-drafted partnership agreement, mitigate the risks of such departures. However, business owners will likely be better served if they structure their business as a limited liability company or corporation instead of a general partnership. Please feel free to contact me if you would like more information on structuring your business.
Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, Suite 102
Springfield, New Jersey 07081
DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.