Ending a partnership is not just a tidy-up but a significant turning point. It marks a clear line between shared commitments, decision-making, assets, and reputation. The choices made during the winding up process matter — from what you retain to how you communicate and document the transition. These steps shape life after the partnership and affect everyone involved. In the pursuit of preserving relationships and avoiding disputes, careful planning and consideration during the winding up process are essential. This article outlines what is involved in ending a partnership, the key steps, and important considerations for risk management and proper planning to move forward with confidence.
What is a partnership?
Section 1 of the Partnership Act 1892 (NSW) defines a ‘Partnership’ in the following terms:
“Partnership is the relation which exists between persons who conduct business together with the intention of making and sharing profits.”
With an emphasis on having a common view of profit, this relationship is an ongoing commercial activity rather than a one-off transaction or joint venture. As it is not a separate legal person (i.e. a company) partners are generally personally liable for a firm’s obligations.
Even historically, a partnership has been described in conjunction to obligations under a ‘fiduciary relationship.’ Lord Wensleydale in Cox v Hickman (1860) 8HLCas 268 defined ‘two or more persons agreeing that they should carry on a trade, and share the profits of it, each as a principal, and each as an agent for the other.’ It is through this principal and agent relationship that they owe each other a fiduciary duty that ‘will be molded to the character of the particular relationship.’
The ‘persons’ in a partnership may be a natural person (human) or corporate entity (i.e companies). The activity of ‘conducting business’ or ‘carrying on a business’ can only be described as ‘continuous’ and not an isolated act but rather numerous activities that relate together to make it an ongoing concern for parties involved. Smith v Anderson (1880) 15 Ch D 247 demonstrated that carrying on a business ‘implies a repetition of acts, and excludes the case of an association formed for doing one particular act which is never to be repeated.’
Note: Each state and territory has its own Partnership Act.
Advantages and Disadvantages of a Partnership
Including, but not limited to:
Advantages
- Allocation of work amongst participants with diverse skill sets, experience and expertise
- Agreements between partners whilst may include non-compete obligations, does not enforce onerous disclosure requirements; allowing them to keep business affairs relatively private
- As it is not a separate legal entity. They are not taxed separately for income tax purposes to which individuals’ partners may access a Capital Gains Tax (CGT) discount.
Disadvantages
- Unlimited liability, as it is not a separate legal entity. Therefore, partners are personally responsible for the debts and obligations of the business
- Not only does legislation impose boundaries on partnership size (See. Corporations Regulations 2001, 2A.1.01 (1))
- It has limitations on profits as they are shared equally amongst partners as well as its longevity, making it difficult to attract long-term investments and secure financing.
- Ultimately, this structure requires a high level of engagement and commitment with a risk of disagreements and conflict that comes with diverse goals, working styles, and personalities.
Dissolution and Winding Up
Often used synonymously, it is important to distinguish between the process of ‘winding up’ and ‘dissolving’ a partnership. Its importance relates to both processes having different rights and duties. Dissolution is the legal event that forms the end of a partnership relationship. It can be triggered by either agreement, notice, death or bankruptcy or a court order under respective Partnership Acts. A business partnership dissolves if you (1) close the business or (2) change who is in the partnership. To ‘wind up’ a partnership is related to the process of settling the affairs of a partnership in relation to assets, debts and liabilities. This includes ceasing trade and preparing final accounts in order to distribute any deficiencies or surplus between partners. Therefore, a partnership can dissolve without a full wind up if it is reconstituted.
Reasons for Ending a Partnership
Partnerships can end for planned or unplanned reasons, arising from contractual arrangements, commercial realities, or legal requirements. Planned endings include decisions made under the partnership agreement (such as term-based or notice-based exits) or strategic changes to how the business will operate. Unplanned endings stem from circumstances that make continued cooperation unworkable or non-compliant. In addition, most frameworks recognise statutory or court-supervised dissolution where continuing the relationship is no longer viable or fair. Whatever the trigger, the key is to identify which category applies—contractual, commercial, or legal—because each carries different procedures, timelines, and consequences for partners, staff, clients, and creditors.
Common reasons for ending a partnership include (but not limited to):
- The term of the partnership agreement expires
- A disagreement arises at the operation of the partnership (i.e a breakdown in relationship)
- A court orders the partnership to end
- A partner becomes bankrupt
- The death of a partner
- A business becomes insolvent, or a partner can no longer legally run a business
Steps towards Dissolution
The following are steps you should consider when ending the partnership:
- If you are changing partners check if you need to form a new or reconstituted partnership with the Australian Taxation Office (ATO)
- Consolidate the existing partnership agreement as to your rights and responsibilities in exiting the partnership
- Notifying the other partners by issuing a formal written notice stating the intention to retire from or dissolve the partnership.
- Seeking Legal advice as to assist with interpretation of both partnership legislation and agreements in force.
- Consultation with a financial professional. Seeking legal advice may not be able to cover specialised financial advice, specifically taxational aspects of the partnership. A financial professional such as an accountant will be able to advise upon specific assets, income and expenses.
Application for Court Order for dissolution
Under section 35 of the Partnership Act 1892, upon application by a partner, a court may order a dissolution in any of the following circumstances:
- When a partner has been declared in accordance with law to be of unsound mind and incapable of managing the partner’s affairs, or is shown to the satisfaction of the Court to be of permanently unsound mind, in either of which cases the application may be made as well on behalf of that partner by the partner’s committee or next friend or person having title to intervene as by any other partner.
- When a partner, other than the partner suing, becomes in any other way permanently incapable of performing the partner’s part of the partnership contract.
- When a partner, other than the one bringing the claim, engages in conduct that the Court considers likely to harm the operation of the business, having regard to the nature of the business.
- When a partner, other than the party suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise conducts himself or herself in matters relating to the partnership business so that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with the partner.
- When the business of the partnership can only be carried on at a loss.
- Whenever in any case circumstances have arisen, which, in the opinion of the Court, render it just and equitable that the partnership be dissolved.
Futureproofing your Partnership
Investing in your partnership at it’s inception by considering such common reasons for dissolution is an important step.
The following should be considered at the beginning stages of the partnership. This includes before approaching new partners and investing funds into the future partnership:
- Intellectual Property, Branding and Data
- Roles, responsibilities and decision rights
- Governance and structure
- Financial distribution
- Restraints and Incentives
- Compliance
Consultation with legal, financial, and marketing professionals will assist in decision making for the above.
Conclusion
Ending a partnership is more than a tidy-up—it has the potential to form new reputations, relationships, and future opportunities. However, it is important to separate the decision to end from the process of ending: first acknowledge the relationship is over, then wind things down methodically. Dedicating the focus on clarity (agree what’s ending and when), communication (tell the right people, at the right time, in the right tone), controls (protect money, information, and commitments), and records (document who decided what, and why). Done effectively, a civil closing preserves goodwill, reduces stress and cost, and lets each partner move on.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
Written by Brooke Nguyen, Solicitor
