Dissolving a partnership
A partnership can be either an ordinary partnership or a limited liability partnership (LLP); both forms comprise more than two people setting up in business sharing the risks, costs and responsibilities, as well as the profits. One consequence of being a member is that each is liable for the partnership’s debts and obligations. There is no limit of liability for an ordinary partnership meaning that a claimant can sue either one or all of the partners for the full amount of their claim. LLPs have similar flexibility and tax status to ordinary partnerships. With the benefits of limited liability each partner is liable only for the amount of capital they invest.
The vast majority of partnerships are set up informally without a written partnership agreement and if this is the case, then dissolution is covered by the Partnership Act 1890. With just two members the partnership will dissolve automatically should one member die, is made bankrupt or resigns. Partnerships can also be forcibly dissolved when an event occurs that makes it unlawful for the business to continue or for partners to carry on as a partnership e.g., if an accountant has their practising certificate withdrawn. In this case the partnership will be dissolved, and a new one can be formed of the remaining members. If the partnership comprises two members or more then it can continue. In comparison, unlike ordinary partnerships, LLPs do not have to be dissolved on the resignation, death or bankruptcy of a member. Instead, the Limited Liability Partnerships Act 2000 applies a modified form of the law relating to companies’ insolvency and winding up.
Individual partners are taxed as sole traders but with their income being a share of the profits declared on the partnership tax return. If the partnership ceases, then the same cessation rules apply as if the partner was a sole trader such that if the final period of trading produces a loss for the partner leaving then that loss can be carried back for three years preceding the beginning of the accounting period in which the loss was incurred, provided part of that accounting period falls within the 12 months prior to cessation.
Should the partnership dispose of assets held on dissolution (e.g. a property or properties), the partner is deemed to be disposing of his proportionate share of those properties. If a partner takes over ownership of an asset on dissolution then the partner receiving the asset is not regarded as disposing of his share. A computation will first be necessary of the gains which would be chargeable on the individual partners as if the asset had been disposed of at its current market value. Where the calculation results in a gain being attributed to the partner receiving the asset, then that gain is ‘rolled over’ (deferred) by reducing their cost by the amount of the gain. In this way the cost carried forward will be the market value of the asset at the date of distribution less the amount of gain attributed.
On cessation, assets qualify for capital allowances that are not actually sold but taken over by one or more of the partners. These assets are deemed to be disposed of and immediately re-acquired at market value (unless the assets are actually disposed. Balancing allowances may be claimed if the market value is less than the written-down value. A balancing charge will be made if the market value is greater than the written-down.
Partner note: HMRC Partnership manual PM163090