Partnerships are a longstanding method by which people come together to create a business in which all of the partners are owners of the business. In North Carolina, partnership is defined under the Uniform Partnership Act (UPA) as “an association of two or more persons to carry on as co-owners a business for profit.”1 Partners are co-owners to the extent that they share in the liabilities and profits of the partnership, but they often have an equal share in the voting and management of the partnership business. So, what happens when a partnership goes awry, and one or more partners decide they would like to leave the partnership?
Under the UPA, when one partner definitively expresses their intention to leave the partnership, the entire partnership is dissolved.2 This is because the partnership entity was the agreement between all of the co-owners, and if one co-owner leaves, the partnership no longer involves the same owners, and therefore the original partnership can no longer exist. Under North Carolina’s adoption of the UPA, a dissolution is “the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.”3 Under the UPA, such a dissolution does not terminate the partnership, the partnership continues until the affairs of the partnership have been “wound up.”4
However, this dissolution does not require the partnership to undergo “wind up” in the same way that “wind up” is usually done in relation to corporations and LLC’s. Under a new case from the North Carolina Business Court, Hardin v. Lewis,5 if one partner effects a dissolution by expressly leaving the partnership, the other partners may continue on as before, but their continuance constitutes a new partnership that has taken over the assets and liabilities of the previous partnership. The previous partnership must still go through “wind up,” but this wind up does not necessarily require the assets of the partnership to be liquidated. Instead, under the Business Court’s new interpretation, relying on case law from other jurisdictions as well as language from the North Carolina Supreme Court, a partnership may “wind up” by ascertaining the interest held by the leaving partner, compensate that partner for their interest, and otherwise carry on as before, only now as a reconstituted partnership entity.6
This is good news for partnerships that are operating without a formal partnership agreement, and are instead operating under the provisions of the North Carolina UPA. Instead of going through a liquidation process that could unnecessarily interfere with the business of the partnership, the partnership can continue on as a new entity and compensate the leaving partner as appropriate under law. If you are having a partnership or business ownership dispute, contact Miller Law Group for a consultation regarding your rights and responsibilities.