Business Law

Breach of Partnership Agreements and Expulsion

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Part of what makes a business partnership work well is having good working relations between the partners. These relationships, like any relationship, don't always last. In some cases, you may end up in a situation where some of the partners decide they want to expel a particular partner. Getting expelled from a partnership is like being permanently expelled from school—you’re kicked out and can’t come back. However, partners need to take care when they expel one of their own or they could end with an expensive legal fight which they end up losing.

Grounds for Expulsion

Ideally the grounds for expelling a partner from the partnership will be set forth in detail in the partnership agreement. The agreement may provide that a partner may be expelled upon vote of the other partners for any reason or no reason. Or, it may specify certain reasons for expulsion, such as:

  • breaching the partnership agreement or othwerwise failing to carry out the partner’s obligations under the agreement
  • being charged with, or convicted of, a crime
  • professional misconduct, or
  • filing for bankruptcy.

The agreement should also specify how the decision to expel is to be made—for example, whether a majority vote is sufficient or a unanimous vote (not counting the partner to be expelled) will be required.

Unfortunately, not all partnership agreements address expulsion; and some partners don't even have a written agreement. In some states, if partners don't have a written agreement that provides for expulsion, the only way to expel a partner is to dissolve the partnership and start a new partnership; which, as a practical matter, can be difficult and expensive. However, most states have adopted a version of a the Revised Uniform Partnership Act which takes a more liberal view. In these states, even if expulsion is not authorized by the partnership agreement, the partners may expel a fellow partner by unanimous vote if:

  • the partner transfers substantially all of his or her partnership interest (other than as security for a loan)
  • it is unlawful to carry on the business with that partner
  • a corporate partner ceases being a corporation in good standing
  • a partnership that is a partner has been dissolved and its business is being wound up, or
  • the partner’s interest in the partnership becomes subject to a charging order.

In addition, in most states, the partnership itself, or any individual partner, may go to court and obtain a court order expelling a partner if:

  • the partner engaged in wrongful conduct that adversely and materially affected the partnership business
  • the partner materially and willfully brached the partnership agreement, or
  • the partner’s conduct makes it not reasonably practicable to carry on the partnership business with that partner.

What Happens After a Partner Is Expelled?

In some states, unless the partnership agreement provides otherwise, a partnership automatically dissolves upon expulsion of a partner. However, the partnership business doesn’t necessarily have to end. The remaining partners can always agree to form a new partnership and carry on the business. If they elect not to form a new partnership, the business will have to be wound up and terminated. See “Winding Up Business and Distributing Assets.” However, in many states, a partnership may continue after a partner is expelled even if the agreement is silent on this issue.

Either way, the expelled partner must be provided an accounting and paid for his or her share of the partnership business. If the partnership is dissolved the business wound up and the assets sold, all the partners will obtain a share of whatever is left after the partnership debts are paid. If the partnership business is continued by the remaining partners, the expelled partner will have to be paid for value of his or her partnership interest. How this is done should be spelled out in the partnership agreement. If not, the default provisions of your state partnership law will control. Generally, these require that the expelled partner be paid the fair market value of his or her interest in the partnership assets.

Unlawful Expulsions

In some cases a partner may bring a legal action to prevent his or her co-partners from expelling him or her from a partnership and/or require that the partners pay the wrongfully expelled partner damages. This may occur where a partner is (1) expelled in violation of the partnership agreement; or, (2) even if the expulsion was permitted by the agreement, it was done in bad faith.

Partners have a fiduciary relationship with each other, meaning they must always act in good faith and refrain from taking any advantage of one another. See "General Partnership and Fiduciary Duties." Examples of bad faith include expelling a partner for economically predatory reasons—that is, a partner is expelled because it economically benefits the other partners, not because that partner did anything wrong; or expelling a partner because he or she complains about wrongdoing by other partners.

In additon, an expulsion that involves discrimination against a partner on the grounds of sex, gender reassignment, disability, religion or belief, sexual orientation, or age is unlawful, as is an expulsion on racial grounds.

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