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What Happens when one Partner Leaves a Partnership?

In a January 2007 decision, Estate of James H. Matteson v. Robert R. Matteson et al. , the Wisconsin Appellate court takes the time to further clarify its decision from Lange v. Bartlett , 121 Wis. 2d 599, 602 which stated

[W]hen one partner leaves a partnership and allows the other to continue the business, the departing partner is entitled to receive, in addition to a share of the value of the business, a share of the profits until the business is wound up. We also held that the continuing partner is entitled to be compensated for work done during this time.

In this case, Robert and James had a partnership in a radio sales and service business. In 2001, James left the partnership, but Robert continued the business as an LLC. They never agreed how James should be compensated for his half of the partnership, and unfortunately soon thereafter James died. His estate filed suit and 3 years of litigation ensued.

The court explains what happens to a partnership when one party leaves and there is no written agreement,

Because the Mattesons had no written agreement to the contrary, their partnership’s end is controlled by Wis. Stat. ch. 178 (2003-04), the Uniform Partnership Act…When a partner decides to cease involvement with a partnership, that partnership is dissolved. Wis. Stat. § 178.26(1)(b). Despite the usual meaning of the word, dissolution does not end the partnership; rather, the partnership continues to exist until its affairs are concluded. Wis. Stat. § 178.25(2).

The court went on to explain that there are three possible outcomes when a partnership dissolves and there is no written agreement:

First, the former partners may agree on a settlement for the outgoing partner’s share of the business. Schaefer, 91 Wis. 2d at 375.

Second, if no agreement can be reached, the outgoing partner has the right to sue for windup, forcing the remaining partner to liquidate the partnership’s assets and pay off any creditors. Id. at 375-76. Whatever money remains is then divided between the partners according to their shares in the partnership; the net effect is that all partners share in any profits or losses between dissolution and the final accounting. Id. at 375, 382.

The third possibility is that the outgoing partner allows the other partner to continue the business, but the partners cannot agree on a payout for the outgoing partner. The outgoing partner still has the right to sue for windup, but the ultimate settlement of accounts is different than if the business had been terminated. Id. at 382. An outgoing partner in this case is entitled to his or her share of the value of the business at the date of dissolution, plus, at the outgoing partner’s election, either interest on that amount or a share of the business’ profits from the date of dissolution until the final settlement of accounts. Id.; Wis. Stat. § 178.37.

This case fell under the third scenario, therefore the Court ended up ruling that the profits from the end of the partnership to the time of actual winding up be split in the same percentage as they were split during the partnership, 45%/55% and that Robert be compensated for his reasonable labor and management services to Matteson Communications for the time between dissolution and the date of trial.

While the end result was one that was probably fair, and most likely would have been the agreement of the parties, this case highlights yet another reason to make sure that for all entities, Corporate, LLC, or Partnership there is a written agreement as to what occurs during dissolution and how the profits are to be split. While the end result may have been considered fair, by not having the agreement in writing in advance, both sides spent exorbitant amounts on legal fees… “An ounce of prevention is a worth a pound of cure.”

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