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Partnership Disputes in Small Businesses: What to Do When a Partner Leaves

Small Businesses

They said it wouldn’t last, and they were right. You or a business partner decides to leave your business partnership for some reason, good or bad. How does the partnership handle things when a partner leaves?


If you were smart, you and your partner(s) drafted a partnership agreement at the beginning of the partnership that included clauses that governed what would happen if a partner should leave, die, or become incapacitated.

A well-drafted partnership agreement signed by all partners prevents disputes and financial problems in the future. At a minimum the agreement should:

  • Address the transfer or discontinuation of business licenses and name registrations
  • Include a statement that the partner(s) leaving are no longer responsible for financial obligations to the remaining partners
  • Provide guidelines for each partner to assume assets and liabilities according to their ownership interest

You also need a strong Separation Agreement documenting everything and it should be executed properly by the Company and the Partner(s).

The departing partner should have his or her name removed from all formation documents including:

  • Operating agreement or Bylaws/Corporate Register
  • Articles of Formation
  • With the IRS if the partner’s name was used as a “Responsible Party” when the FEIN was procured

If the partner was a personal guarantor of surety, he or she must also be removed as:

  • Borrower on a line of credit
  • Tenant on a commercial lease
  • Guarantor for the company’s Merchant Account

In some cases, the remaining Partners must renegotiate a new contract and dissolve the old one. If the Partner cannot be removed from a document, that Partner (or you, if you are the one leaving) should retain a business attorney to negotiate with the Company to create an escrow account to pay off the obligation. The remaining Partners may be required to indemnify the one departing. 

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