Legal Advice Column for Hey Little Engine Small Business Blog

“My business partner hasn’t been holding up her end of the business for a while. What are the steps I would need to take in order to dissolve the partnership even if she isn’t amenable to doing so?” – Ann Tagonized

I’m very sorry to hear about your deadbeat partner, Ms. Tagonized. Unfortunately, such partner conflicts are one of the most common legal problems a small business owner can expect to face in their lifetime.

The facts you’ve provided are very vague and “companies law” is a very broad subject. So, in the interest of concision, I am going to assume that you and your partner: (1) primarily operate your business in Illinois;[1] (2) have, through express writing or concerted action for profit, formed a “general partnership;” and (3) have not executed a partnership agreement.[2]

The Illinois Uniform Partnership Act and Partnership Agreements

As a preliminary matter, I cannot overstate the importance of a well drafted and comprehensive partnership agreement to a partnership’s well-being. If you take nothing else away from this article, remember that.

To appreciate why, you have to first understand that, in Illinois, partnerships are regulated by the Illinois Uniform Partnership Act (“ILUPA”)[3] which prescribes both (1) “mandatory;”[4] and (2) “default” rules. A partnership agreement is a voluntarily negotiated contract between a partnership’s partners, which allows the partners to depart from the default rules of the ILUPA in – almost – any way they deem fit. In this way, a Partnership Agreement allows the partnership to set its own rules for a host of topics, including: (1) governance; (2) finances; and (3) you guessed it – dissolution.[5]

There is little doubt in my mind that a well-drafted and comprehensive partnership agreement would have made your present plight easier to resolve. This is because business partners generally have better information about what rules or procedures will be the best fit for their unique business. Thus, by allowing you – rather than the defaults rules set by the state of Illinois – to dictate the process and terms of your partnership’s dissolution, a partnership agreement can save you a lot of anguish and legal fees in the long run.

Dissolution under the Illinois Uniform Partnership Act

That said, in the absence of a partnership agreement, the ILUPA describes six events which will automatically cause dissolution of a partnership.[6] Of these six, only one is relevant under the facts and assumptions provided: a petition for judicial dissolution of the partnership because the partnership’s operation is no longer reasonably practicable due to another partner’s behavior.[7]

While proving that your “partnership [is] no longer reasonably practicable due to another partner’s behavior” may seem straightforward enough, I assure you the process can get complicated – and expensive – quickly. Consider the following:

• First, subject to a five year statute of limitations,[8] you will need to hire an attorney to file and litigate the matter. Be prepared to feel the costs of litigation early and often! Simply petitioning the Cook County Court of Chancery will cost $337.00 in filing fees. Further – while highly variable and not subject to simple summary – the 2012 average hourly billing rate for attorneys was $370 for associates and $536 for partners.
• Second, the costs described above will be greatly exacerbated if your ne’er-do-well partner elects to oppose your petition. The reality is that petitioning a court is a formal adversarial process. This means that the judge must review the facts and arguments presented by all parties before reaching their final judgment. Unless settled out of court, this process will probably take, at a minimum, six months, and potentially years.
• Third, presuming you are successful and your partner decides not to appeal, you will need to actually enforce the court’s judgment. The unfortunate reality is that court judgments are not self-enforcing. It is possible your partner may be foolish enough to ignore the court’s judgment. If this is the case, you will be forced to hire an attorney (again) to file a post-judgment enforcement motion in the court that entered the initial decree.
• Finally, I want to make clear that a formal “dissolution” of your partnership is only the first step in actually practically ending your partnership. A non-exhaustive list of tasks you will need to take on to properly end your partnership includes: (1) winding up the partnership’s business;[9] (2) settling each partner’s partnership account;[10] and (3) filing a “statement of dissolution” with the state.[11]

The above is a gross simplification of the complexities of the dissolution process. However, even in these broadest strokes, the picture is clear – dissolution through litigation is no trivial thing! Even with the best legal representation, the financial and emotional costs associated with a formal judicial petition to dissolve your partnership will accumulate quickly.

Non-Dissolution Solutions

Thankfully, partnership dissolution through litigation is not the only, nor the wisest, way of accomplishing your goal. While outside the scope of this article, a good business attorney may, depending on the circumstances, advise you of the following alternative solutions.

• Negotiation and execution of a partnership agreement clarifying the rights and responsibilities of both partners to the partnership.
• Negotiation and execution a partnership buyout agreement.[12]
• Self-disassociation from the partnership.[13]
• Partial, or complete, liquidation of the partnership’s assets.
• Continuation of the partnership in spite of your ne’er-do-well partner for as long as the partnership, though potentially inequitable, remains personally profitable.

As a final warning, all of the above options (as well as dissolution through judicial petition) will have significant legal and tax consequences.

Conclusion

As a final note, I would like to remind you of the old maxim – “an ounce of prevention is worth a pound of cure.” A well drafted and comprehensive partnership agreement would make exercising any of the options described in this article much easier. I strongly advise you consult an experienced business attorney to prevent these types of problems in the future, rather than attempting to cure them after the fact.

Hope this is helpful, Ms. Tagonized. Be well!

Scott Kane
Attorney at Law and Sole Member
Kane Community Law, LLC
(224) 999-0532
[email protected]
kanecommunitylaw.com

[1] Or any other jurisdiction which has modeled its partnership law after the Revised Uniform Partnership Act, such as:  Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota (substantially similar), Tennessee, Texas (substantially similar), U.S. Virgin Islands, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming.

[2]  805 ILCS 206/103.

[3] 805 ILCS 206.

[4] 805 ILCS 206/103 (b)(1)-(9).

[5] 805 ILCS 206/801 (3).

[6] They are: (1) disassociation of a partner in a partnership at will; (2) expiration of a partnership for a definite term’s (a) term or (b) undertaking; (3) an event described in a partnership agreement; (4) an event which makes the partnerships operation unlawful; (5) judicial petition; or (6) judicial determination that it is equitable to wind up the partnership. 805 ILCS 206/801 (1)-(6).

[7] An individual partner can petition the Illinois judiciary for a legal order to dissolve their partnership on three different grounds: (1) likely unreasonable frustration of the economic purpose of the partnership; (2) operation of the partnership no longer reasonably practicable due to another partner’s behavior; or (3) the partnership can no longer comply with its own partnership agreement. 805 ILCS 206/801 (5)(i) – (iii).

[8] 735 ILCS 5/13-205.

[9] 805 ILCS 206 [s][s] 802 – 803.

[10] 805 ILCS 206/807.

[11] 805 ILCS 206/805.

[12] A private contract between you are your former partner transferring his interest in the business to you in exchange for some valuable consideration.

[13] 805 ILCS 206/701 and 801.