Leaving a partnership: Key considerations for partners

As part of our corporate service offering at Boyes Turner, we assist partnerships in all aspects of their governance, including drafting the Partnership Agreement, amending existing agreements and dealing with the appointment and retirement of partners. This article highlights the key steps and considerations to take when a partner is looking to retire from a partnership. In the context of a partnership, ‘retirement’ refers to any voluntary departure from the partnership rather than retirement on reaching a particular age.

This article will focus on general partnerships rather than limited partnerships or LLPs.

What is a partnership?

A partnership is defined as a ‘relation which subsists between persons carrying on a business with a common view of profit’. A partnership itself is not a legal entity with its own legal personality. For example, it cannot enter into contracts or own assets. Instead, all partnership business is conducted through the individual partners themselves, who can bind the partnership and act on its behalf. A key feature of a general partnership is that, unlike a private company limited by shares or a limited liability partnership, the liability of the individual partners is unlimited. This means that every partner in the partnership is fully liable jointly with the other partners for all debts and obligations incurred by the partnership.

It is best practice to have a partnership agreement in place to govern the running of the partnership. This can specify the split of profit between partners, how much capital each partner is contributing and the process for appointing new partners and retiring existing partners. In the absence of any agreement, the provisions of The Partnership Act 1890 will apply.

Key considerations for partnership retirement

When a partner wishes to leave a partnership, the following should be considered:

The partnership agreement

If there is a partnership agreement in place, it should be checked for any specific requirements or process for the retirement. This could include:

• details of any notice period a partner must give before they can retire and at what date the retirement is to take effect. Many agreements require prior written notice, with the end of the notice period coinciding with the partnership’s accounting year end to simplify the calculation of profits due to the retiring partner;
• details of any consents needed before a partner can retire;
• clarity as to what happens to that partner’s profit share and their capital contribution;
• clarity as to the status of the partnership once a partner retires (i.e. does the partnership dissolve entirely or does it continue with the remaining partners?). A partnership needs two or more people to exist otherwise it will dissolve;
• automatic retirement provisions (i.e. on material breach of the partnership agreement); and
• any restriction on the partner once they have retired from the partnership (i.e. non-compete provisions).

Details of the retirement

It will be necessary to confirm the details of the retirement with the retiring partner, including:

• the intended date of retirement;
• identifying any partnership property which is held by them which will need to be transferred to the continuing partners and whether this has any security over it which would require consent from the chargee before it could be transferred; and
•  details of any payments to be made to the retiring partner i.e. payment of the profits due to them, repayment of their capital contribution and/or any goodwill payment.

Documenting the retirement

 A deed of retirement would need to be drawn up and entered into between the retiring partner and the continuing partners to record the specific terms of the retirement. Minutes of a partnership meeting would also be drawn up to record any consent to the retirement required from the other partners.

Liability and notifications

A key concern of a retiring partner will be their liability position post-retirement. Under law, a partner does not automatically cease to be liable for debts and obligations of the partnership incurred before their retirement. However, the partners may agree (together with creditors) to discharge the retiring partner from any existing liabilities.

A retiring partner may also remain liable for debts and obligations of the partnership incurred after their retirement unless the correct notice of their departure has been served. Notice is required as any person who deals with a partnership after a change in its members is entitled to treat all apparent members of the partnership as still being members until notice of the change has been given.

The following steps should be taken to minimise the risk of any continuing liability of the retiring partner:

a) actual notice of the retirement must be given to existing creditors of the partnership (i.e. by a letter);

b) a notice of the retirement should be published in the London Gazette. This serves as valid notice of the change to people who have not had any prior dealings with the partnership;

c) the retiring partner should not hold themselves out (or knowingly allow themselves to be represented) as still being a partner of the partnership as they would remain liable to anyone who gives credit to the partnership on the faith of such representation; and

d) an indemnity should be added to the Termination Agreement whereby the continuing partners indemnify the retiring partner for any existing liabilities of the partnership so that the retiring partner does not have any continuing liability (expect in the cases of fraud or negligence on the part of the retiring partner or where the liabilities are covered by insurance).

Overall, the more guidance that the partnership agreement can provide in terms of the process for outgoing partners, the easier it will be to effect the retirement as and when the time comes. The liability of the outgoing partner will be a key concern, and the correct notifications must be made to ensure that they do not continue to be liable for the partnership’s debts.

Need help with partnership retirement?

For further detail on partnerships and how Boyes Turner can assist with these, please contact the corporate team directly by email at [email protected].