Partnership disputes may arise when business partners disagree on key decisions, responsibilities, or the direction of the company. These conflicts can involve breaches of the partnership agreement, unequal contributions, or disputes over profit distribution and management control.

When a partnership dispute becomes unmanageable, it may be necessary to remove or dissolve a relationship with a 50/50 business partner. Removing a partner can be a complex process that involves legal, financial, and strategic considerations, such as:

• Legal considerations may include reviewing the partnership agreement and ensuring compliance with state laws governing partner removal.
• Financial considerations may involve assessing the value of the departing partner's share and settling outstanding debts or obligations.
• Strategic considerations focus on how the removal will impact the business's future operations, reputation, and overall decision-making process.

You should get representation from a Pittsburgh attorney specializing in business disputes to protect your interests. 

Legal Grounds for Removing a Partner

Pennsylvania's Uniform Partnership Act and Pennsylvania Business Corporation Law (BCL) govern partnership and corporate agreements. While these laws provide some guidance, the specific legal grounds for removing a partner often depend on the terms of your partnership agreement. The following situations may provide legal justification for removing business partners:

Breach of the Partnership Agreement 

If one business partner violates the terms of the agreement, such as engaging in fraud, negligence, or breach of fiduciary duties, the other partner may have grounds to remove them. Examples of these causes of action include:

• Fraud: A partner intentionally misrepresents financial statements, inflating profits to deceive the other partner into making business decisions based on false information.
• Negligence: A partner repeatedly fails to fulfill their responsibilities, such as neglecting critical business operations or failing to meet contractual obligations, leading to financial losses for the business.
• Breach of Fiduciary Duties: A partner diverts business opportunities or clients to their own personal ventures without informing or getting consent from the other partner, violating their duty of loyalty and trust.

Misconduct or Wrongdoing 

Not all business partners may be ethical. A problematic business partner engaging in illegal or unethical conduct can make a business partner force their removal, particularly if such actions harm the business.

Inability to Perform Duties 

If a partner becomes incapacitated or is unable to fulfill their role, it can serve as grounds for dissolution of business partnerships or forced removal.

Review the Partnership Agreement

Before taking any legal action, carefully review your operating or partnership agreement. These documents should outline the terms of the partnership, including provisions for removing a partner, dissolving the partnership, and resolving disputes. In some cases, the business partnership agreement may contain a buyout clause or other mechanisms for removing a partner. If no formal agreement exists, Pennsylvania's default partnership laws will apply, making the process more challenging.

Negotiating a Buyout

One of the most common ways to remove a partner is through a buyout agreement, in which one partner buys the other’s share of the business. In Pennsylvania, buyout terms may be outlined in the pre-existing buy-sell agreement as part of the signed partnership agreement. If not, you will need to negotiate the value of the partner’s interest and agree on payment terms. Some steps involved in this process include:

1. Business Valuation: Hiring an independent third party to conduct a business valuation ensures that the buyout price is fair and accurate.
2. Negotiating Terms: Work with your partner to agree on the terms of the buyout, including whether it will be a lump sum or paid in installments.
3. Financing the Buyout: Consider financing options if you do not have sufficient funds to complete the buyout under the operating agreement on your own.

Dissolution of the Business

If a buyout is not feasible or you and your partner cannot reach an agreement, dissolving the business may be the only option. The steps involved include:

File a Partnership Dissolution Form

To officially dissolve the business, you must file a Partnership Dissolution Form with the Pennsylvania Department of State. This form, along with any required partnership dissolution agreement documentation, legally terminates the partnership and ensures the state recognizes the dissolution.

Notify the Parties Associated with the Business

You need to inform parties involved with the business such as employees, customers, creditors, landlords, and government agencies like the IRS. Notifying each party individually can be time-consuming and complex, so you may consider a mutually agreed-upon public announcement via media channels.

Settle all Debts and Liabilities

Before dissolving the partnership, all outstanding debts and liabilities must be paid off. This ensures that creditors and other financial obligations are satisfied, preventing future legal disputes or claims.

Divide Assets

After settling debts, the remaining assets must be divided between the partners. This can include property, equipment, and financial accounts. It's crucial that the division is fair and in accordance with any prior agreements or partnership terms.

Close All Company Accounts

To fully wind down the business, you must close business bank accounts, credit lines, and other financial accounts. This prevents future transactions or liabilities from arising under the business name.

Legal Action: Forcing a Partner Out

In extreme cases where a partner refuses to leave and negotiations break down, you may need to file a lawsuit to forcibly remove them from the partnership. Pennsylvania law allows you to seek judicial dissolution of a partnership under certain conditions, such as:

• Partner misconduct or illegal activity
• Inability to work together effectively
• Financial misconduct or mismanagement

Litigation should always be a last resort as it can be expensive and damage the business’s reputation. However, if other options fail, a court may order the removal of your partner or the dissolution of the partnership.

Alternatives to Removing a Partner

Before seeking to remove your partner, consider alternatives that may allow you to resolve the conflict without dissolving the partnership. Some of these options include:

• Mediation or Arbitration: Working with a neutral third party to mediate or arbitrate the dispute can lead to a resolution without the need for legal action.
• Revising the Partnership Agreement: If the issue stems from the current structure of the partnership, consider revising the agreement to better define each partner’s roles, responsibilities, and expectations.
• Silent Partner Agreement: If the conflict arises from the partner’s management or decision-making, you may be able to negotiate a silent partner agreement, in which the partner retains ownership but steps back from the day-to-day working relationship.

Common Disputes That May Arise in Partnership Dissolution

When dissolving a partnership, conflicts may arise over the division of assets, outstanding liabilities, or differences in how to handle the business’s closure. Disputes over intellectual property, ongoing client relationships, and the value of individual contributions to the business are also common.

Strategies for Resolving Conflicts Amicably

To avoid escalating tensions, it is prudent to approach disputes with a spirit of compromise under partnership agreement rules. Negotiations with the assistance of a Pittsburgh business attorney can help partners find mutually agreeable solutions. Creating clear documentation of decisions, drafting fair agreements, and adhering to pre-existing partnership agreements can reduce misunderstandings.

Steps to Take After a Partnership Dissolution  

Re-Evaluating Business Structure

Once a partnership has been dissolved, you may consider future business plans. This might involve forming a new partnership or transitioning to a different business structure such as forming a sole proprietorship or limited liability company (LLC) to ensure greater control and protection of personal assets moving forward.

Compliance with Legal Requirements

After the dissolution, ensuring compliance with local, state, and federal regulations is critical. This includes closing tax accounts, filing final tax returns, and updating government entities about the business's closure to avoid future penalties or liabilities.

Get Skilled Legal Representation for Partnership Dispute Resolution or Partnership Dissolution in Pittsburgh

• Experience in Partnership Disputes: At Very Law, Pittsburgh business attorney Ryan D. Very, Esq. has extensive experience and a proven record of resolving complex partnership disputes and facilitating smooth partnership dissolutions.
• Creative Legal Solutions: Ryan develops customized strategies for each partnership dispute or dissolution, ensuring that your business and personal interests are protected.
• Strong Negotiation or Litigation: Whether resolving disputes amicably or pursuing litigation, Ryan’s skill in both areas ensures the best possible outcome for your case.
• Client-Centered Representation: With a focus on clear communication and personalized support, Ryan and his legal team guides clients through every stage of the partnership dispute resolution or partnership dissolution process.

To schedule your confidential consultation with our legal team, call us at 412-424-6199 or contact us online.