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San Diego General Partnerships: What Happens if a Partner Leaves?

In San Diego, a general partnership can be formal or informal. Under California law, in simplest terms, a partnership exists if two or more persons or entities jointly own a business for the purpose of making money. If the partnership is just two people and one partner leaves the partnership, then the partnership comes to an end. The partnership needs to pay its debts, liquidate and distribute its assets, and otherwise wind up its business. The partners then go their separate ways.

If the partnership has more than two people, then the partnership might continue if various actions are taken by the remaining partners. Partnerships are governed by the California Uniform Partnership Act of 1994. See Cal. Corp. Code, §§ 16101 et seq.

San Diego General Partnership: A Partner Leaving is “Dissociation”

Under California law, the legal term is “dissociation” when a partner leaves the partnership. There are many reason for dissociation including reasons that are triggered by the statute. Cal. Corp. Code, § 16601. They include:

Death or disability or incapacity of a partner
Partner’s desire to dissociate – notice is given to remaining partners
Expulsion by the other partners – involuntary dissociation
Judicial expulsion for wrongful acts
Expulsion triggered by contractual agreement – something in the partnership agreement, for example
Partner’s bankruptcy
Other circumstances

San Diego General Partnership: Legal Effect of Partner’s Dissociation

When a partner is dissociated, either voluntarily or involuntarily, the legal effect is that the partner no longer has a right to participate in the management and conduct of the partnership business. Furthermore, the partner is then freed from his or her duty of loyalty with respect to competition. That is, the newly dissociated partner may now compete with the partnership. However, in winding up the partnership (if it is dissolved), the dissociated partner cannot engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. See Cal. Corp. Code, §§ 16404 & 16603.

Under Section 16703, partner’s dissociation does not of itself discharge the partner’s liability for a partnership obligation incurred before dissociation. A dissociated partner might still be liable for debts of the partnership for up to two years if the creditor – for example – thought the partner was still a partner and did not have actual or constructive notice of the partner’s dissociation. This is one reason for filing a Statement of Dissociation with the California Secretary of State under Section 16704.

Aside from effects imposed by the statute, the dissociated partner may be bound by various contractual obligations set forth in the partnership agreement or other agreements.

San Diego General Partnership: Continuing the Business

As noted, if there are more than two partners, the partnership can continue to operate its business if:

The remaining partners vote to continue the business and
The remaining partners buy out the dissociating partner at the price — minus setoffs — that the dissociating partner would have received upon liquidation

Contact San Diego Corporate Law Today

If you would like more information about partnerships and what happens if a partner becomes dissociated, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard and his dedicated staff provide a fully panoply of legal services for all partnerships. Mr. Leonard can be reached at (858) 483-9200 or via email.