Retirement from a partnership – things to consider

If you run your business by way of a general partnership (not an LLP) and one of the partners wishes to retire, do you have the right documents in place to allow for this? There are a number of things to consider.

Does the partner wishing to retire have a right to do so?

A partner has no automatic right to retire from a general partnership. A partner can only retire in one of the following circumstances:

• Where the Partnership Agreement allows for retirement
• With the consent of all the other partners
• By giving notice to bring the partnership to an end (if the partnership was entered into for an undefined term).

Can the partnership continue following a retirement?

The retirement of a partner may bring about a dissolution and winding up of the partnership. If the retirement leaves a single remaining partner, the partnership will come to an end. If there is more than one remaining partner and there is a written Partnership Agreement, this should contain provisions as to if, and how, the partnership can continue following a retirement. If there is no written Partnership Agreement, the provisions of the Partnership Act 1890 apply.

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If the partnership is to continue following a retirement, what needs to be done to continue the business?

This very much depends on the type of business, its assets and the provisions of any partnership agreement. However, some key things to consider would be:

• Does the retiring partner own (jointly or alone) any land/property which is held as partnership property or used by the partnership? If so, how will this be dealt with? The legal title may need to be transferred, leases may need to be assigned, a new Declaration of Trust entered into or a new lease granted.
• If there are mortgages on the partnership properties which need to be transferred, the lender’s consent would be needed for any transfer and the retiring partner will want the lender to release their liability for any loans/debts.
• How will the retiring partner’s share be paid out and what are the financial implications of this?
• Will a new partner be brought in to replace the retiring partner?
• Will the business continue in the same way and, if not, do changes need to be made to the partnership agreement or should the business be changed to become a limited company?
• If, legally, the partnership would dissolve when a partner retires, does a new partner need to be appointed or a different partnership agreement entered into before the partner retires to enable the partnership to continue?
• If the partnership will come to an end on a retirement, can the business continue? As the partnership has ended, any continuation of the business will be a new business. Consideration will need to be given to the structure of this new business (sole trader, new partnership, limited company) and to how the business assets, including employees and contracts, will be transferred to the new business.

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If your business runs as a partnership but does not have an up-to-date partnership agreement which addresses these issues, please contact Sophie King on sophieking@fraserdawbarns.com