If you have chosen a partnership as the organizational form for your business, you may want to know how the partnership ends. One way that a partnership ends is by the death of a partner. The death of a partner may dissolve the partnership unless the partners have expressly agreed to continue the partnership. If the partnership is not continued, the remaining partners must wind up the partnership. The partnership is terminated when no part of the business is carried on or 50 percent or more of the total interest in both capital and profits has been sold or exchanged in a 12-month period.
Time of Termination
A partnership continues for tax purposes until it terminates. A partnership terminates only if:
- No part of any business, financial operation, or venture is carried on by the partners in a partnership, or
- Within a 12-month period, there are sales or exchanges of 50 percent or more of the total interest in both capital and profits
Winding Up the Business. A partnership does not terminate when it dissolves, if the business still requires winding up. It continues until the liquidation is completed and the proceeds are distributed. However, if one partner buys out all the interests of the other partners, the partnership terminates at the time of the transaction. Although the business is not discontinued, it is no longer being carried on by a partnership. It has become a sole proprietorship.
The death of one partner in a two-man firm will not terminate the partnership if his estate or successor in interest continues to share in the firm's profits or losses. In addition, if one partner in a two-man firm dies or retires, he is considered to be a partner if he continues to receive liquidating payments from the firm until his interest is completely liquidated.
Sale or Exchange of a 50 Percent Interest Terminates the Partnership. A partnership terminates if there is a sale or exchange of at least a 50 percent interest in the partnership over a 12-month period. For example, A-B-C and its partners report on a calendar year basis. On November 30, A sells a 25 percent interest to D. On the following March 1, B sells a 25 percent interest to E. The partnership terminates on the sale to E. However, if D would have resold his interest to E, the partnership would not have terminated because only a 25 percent interest was sold.
There must be a change of 50 percent or more in both capital and profits for the partnership to terminate. A sale of a 40 percent interest in capital and a 60 percent interest in profits will not terminate the partnership.
Death of a Partner
The general rule is that the death of a partner causes dissolution of the partnership. However, the partners can expressly agree that the partnership business will be continued in the event that one or more of the partners die. This agreement is usually contained in the partnership agreement.
Although death dissolves the partnership, a ''community of interest'' still exists until a winding up of the affairs of the partnership takes place. This community of interest exists only for the limited purpose of winding up affairs.
Winding Up the Business
In general, after dissolution, each partner has an equal right to possess the firm assets, to participate in the winding up process, and to dispose of the firm assets for the purpose of liquidating and winding up the firm affairs. If dissolution occurs because of the death of one partner, the surviving partners ordinarily have full power to control and dispose of the assets in order to terminate partnership business. The partners may, however, agree among themselves that one or more of them shall have exclusive authority to possess, control and dispose of the assets.
Even after dissolution, no one individual partner is entitled to exclusive possession for his own use of specific partnership property until:
- The partnership has been liquidated
- An accounting has been made, and
- The property has been applied to the payment of firm debts
Some partners do not have the authority to wind up the partnership, including:
- Bankrupt or insolvent partners
- Partners who have wrongfully dissolved the partnership
Questions for Your Attorney
- What can I do to prevent my partnership from dissolving on the death of a partner?
- When is a partnership considered to be terminated?
- If a partnership is winding up, when is an individual partner entitled to exclusive possession of his share of partnership property?
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