An individual partner/member may leave a partnership in two main ways:
Resignation – the partner/member may decide to leave of their own accord. If there is no written agreement covering the amount of notice that has to be given, this will mean that the partner/member can leave on very short notice e.g. a matter of hours. However, most written partnership/member agreements will require the departing partner/member to give a minimum period of notice. If the member/partner fails to do this they will be in breach of contract and exposed to a claim in damages, unless they can show termination occurred in fact, as a result of an unlawful expulsion, similar to a constructive dismissal in an employment relationship.
Expulsion – If there is no written agreement on this issue, it is difficult for a partner/member to be excluded from the partnership and for a partnership to remain in being. The answer is usually to dissolve the partnership. An LLP will remain in being and the LLP default regulations will kick in. A written agreement by contrast should include provision for excluding a partner/member, with or without cause. If properly drafted it will also contain terms dealing with the method of expulsion, notice required, the departing members/partners entitlement to capital, share of profits, bonus, post expulsion restrictions on trade and any on-going liability for the debts of the business.
Where there is no agreement by the parties that covers the position on the departure of a partner, the position is that a partnership will be dissolved or wound-up. This will mean an end to the business, the sale of its assets, the payment of its creditors and any monies left distributed amongst the partners. This clearly is a pretty disastrous outcome for the business and the remaining partners if the on-going survival of the business is desired and there are two or more remaining partners. This again highlights the need to have a written agreement that deals with the departure of a partner and the payment out of the partner
Limited Liability Partnerships
The rights and duties of the members as between themselves and as between the members and the LLP are governed by an express agreement, if there is one. As with an ordinary partnership, the members of an LLP are not legally obliged to enter into any formal LLP agreement regulating the relationship between them. There is clearly an advantage in having an LLP agreement and the formal procedures for incorporation of an LLP are likely to encourage the members to enter into a formal agreement before the LLP starts business.
A person may leave the LLP by:
- Dissolution, in the case of a corporate member.
- Agreement with the other members of the LLP.
- Giving reasonable notice to the other members.
An LLP like a company has a separate existence from its members. Therefore, in contrast to a partnership, it will not dissolve automatically if, for example a member departs or the membership falls below a certain level.
However, a member cannot be expelled against his wishes from the LLP by a majority of the members unless power to do so has been conferred by express agreement between the members. Therefore it is usual to have an LLP agreement that displaces these default provisions.
Know your rights
It is important therefore, for all partners/members to understand their rights and obligations on a departing partner/member, before the ‘button is pushed’. It is almost always preferable for all concerned to try and agree a solution that all can live with, and afford, as opposed to litigation.
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