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Sometimes the partners in a business may feel it necessary to expel a particular partner. This may be because the partner has broken or breached the partnership agreement. The only way to expel a partner is to dissolve the business unless expulsion is addressed in the partnership agreement.
Generally, partnership agreements do include a power of expulsion. A partnership agreement should set out the circumstances that allow for a partner to be expelled, how the decision to expel is to be made such as by majority vote and state that the partnership may continue without the expelled partner. In addition, there is the matter of payment for the expelled partner’s share of the business.
Bad Faith Expulsions
A court will not allow a partner to be expelled if he or she can show that co-partners, though justified by the wording of the expulsion clause, have in fact taken advantage of that clause for unworthy purposes of their own; this type of expulsion is done in “bad faith.”
An expulsion which involves discrimination against a partner on the grounds of sex, gender reassignment, disability, religion or belief, sexual orientation or age will be unlawful, as will an expulsion on racial grounds.
Continuation after Expulsion
If the partnership agreement or dissolution agreement so provides, the partnership business can be continued after the expulsion of one or more partners. Absent proper authority in the partnership documents, however, the remaining partners may not continue the business after the expulsion of one or more partners.
Dissolution is a process that begins with one or more partners’ decisions to cease association with the other partners, or a similar decision or event that leads to a change in the makeup of the partnership. It continues with the winding up of partnership business, such as performance of existing contracts, payment of firm debts and the collection of receivables. Partnership assets are liquidated and distributed, or if the partnership business is to continue, then procedures that reflect the changes in the membership of the firm are carried out. Dissolution concludes with the termination of the partnership’s legal existence when all procedures are complete.
A partnership can conduct business as well as be sued during the dissolution process, but dissolution generally precludes any new or future transactions from occurring. Even though dissolution has begun, a partner still has the authority to act for the other partners in matters affecting the partnership.
Liability for Breach of Partnership Agreement
Neither a departing partner nor the remaining partners are liable for a breach of the partnership agreement in an at will partnership. An at will partnership is one that does not have a set duration. A breach of the contract is the failure to fulfill the duties under the terms of the contract.
In a partnership that does have a set duration, an expulsion that occurs before the end of the specified partnership term is a breach of the partnership agreement unless it is done for good cause.
Paying for Expelled Partner’s Share
When a partner leaves a business through expulsion and that business is to continue, the outgoing partner must receive payment from the others for his or her share. The terms of payment should be agreed upon in advance.
When a partner wrongfully dissolves the partnership before the end of the term agreed upon in the partnership contract, his copartner may bring a lawsuit against him for damages for breach of contract. Similarly, a lawsuit for damages may be brought by the remaining partners when a partner wrongfully dissociates from the partnership under the Revised Uniform Partnership Act, which a majority of states have adopted.