Dissolution and Termination of a Partnership

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  • 0:07 Partnerships
  • 0:49 Dissolution
  • 3:03 Winding Up
  • 4:58 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley has a JD degree and is an attorney. She has taught and written various law courses.

A partnership is an unincorporated business owned by two or more people. When the partners decide to no longer do business together, they must dissolve, wind up and terminate the partnership. This lesson explains dissolution and winding up.


Partnerships are a popular type of business structure, mainly because partnerships are one of the easiest and least expensive businesses to form. They are also one of the easiest to terminate. A partnership is an unincorporated, for-profit business established and run by two or more individuals. The individuals are known as 'partners' and serve as co-owners of the business.

For example, let's say that Dottie and Dave decide to open a clothing store. Their store will be called D.D.'s Duds. Dottie and Dave are partners in this business. Each has the power to manage some aspect of the business.


Let's say Dottie and Dave run D.D.'s Duds for several years. The business is successful, but Dottie gets tired of the long hours spent in the store and decides she no longer wants to be a part of D.D.'s Duds. Dottie and Dave need to terminate their partnership. Dissolution marks the end of the partnership relationship. It occurs when any partner discontinues his or her involvement in the partnership business or when there is any change in the partnership relationship.

For example, if Dottie leaves the business but Dave remains, then there is a change in the partnership status and dissolution occurs. If Dottie sells her portion of the business to her brother Danny, then Danny and Dave become partners in a new partnership and the original partnership dissolves. If both Dottie and Dave decide to sell the business or close the business, then dissolution of the original partnership occurs.

There are many ways dissolution can occur. For instance:

  • A partner resigns from the partnership
  • A partner withdraws from the partnership
  • A partner retires
  • A partner dies
  • A partner drives out, or expels, another partner
  • The partnership business declares bankruptcy
  • The partners have an agreement to dissolve
  • The partnership business is illegal

For example, let's say D.D.'s Duds specializes in counterfeit clothing that's made to look like designer brands. The clothing is actually an assortment of cheap knock-offs. This practice is declared illegal in California, where D.D.'s Duds is located. As a result, the partnership will be considered legally dissolved.

Keep in mind that dissolution is not the same thing as termination. Dissolution serves as the beginning of the termination process for the partnership.

Winding Up

Dissolution marks the end of business as usual for the partnership business. However, the partnership is not yet terminated. The next step is winding up. During this phase, partnership accounts are settled and assets are liquidated. Winding up serves to end any outstanding legal and financial obligations of the partnership so that the business can be terminated.

State laws govern the procedures for properly winding up a partnership, and therefore, the laws vary. A partnership agreement may also set out the expected procedure. Many states require a Statement of Dissolution be filed with the Secretary of State, followed by a 90-day winding up time period.

In general, winding up is similar to a business bankruptcy process and will include:

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