What Happens if One Partner Wants to Leave the Partnership?

If one member of a proprietorship or corporation decides he or she doesn’t want to be involved anymore, the legal circumstances might get tricky. While each situation is uniquely complex, understanding common contracts and regulations can guide you to a better understanding.

LLCs and partnerships are typically governed by an operating agreement, a document that sets forth important standards such as:

  • Stating that membership interest is not freely transferable
  • Outlining rules, duties and compensations of members
  • Covering how a member wants to leave a business, such as buying out the leaving partner’s membership at a preset percentage of the company’s fair market value

While required by law in only a few states, operating agreements nonetheless play a key role in developing the framework of organizations. In situations with no operating agreement, state laws might automatically call for the dissolution of a company.

When one partner wants to stop being associated with a firm, it is important you follow the correct protocol. It is a good idea to consult with an attorney to ensure the buyout is complete and fair. Not coming to an agreement on the market value could lead to a court case. Often, an individual can post bond to cover attorney fees and court expenses. An independent estimator appointed by the court can appraise the fair market value of the LLC or proprietorship in question.

Taxes are another complicated matter that leaving members have to consider. A former partnership switching to single member status must register as a disregarded entity according to federal state regulations. Single member entities have the income of their organization included on Form 1040.

Of course, it is important to remember to stop the former member’s access to bank accounts, company credit cards or anything else regarding the private dealings of your firm. If the separation is mutual then there’s a good chance both partner will leave the transition feeling satisfied. Otherwise, GovDocFiling is a useful tool in addition to consulting with a lawyer.

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