Removing a Partner From a General Partnership
Removing a partner from a general partnership is the act of removing someone from your business that operates as a partnership.4 min read
Removing a partner from a general partnership is the act of removing someone from your business that operates as a partnership. It can happen in several different ways, but the most common option is through a clause in the partnership agreement itself.
Sample Partnership Removal Clauses
- For example, you can remove the general partner only if the unitholders who have at least 66 2/3 percent of the outstanding units approve it. This action must also provide for an election to name a successor to the general partner by the unitholders who have the majority of the outstanding units. The removal of the partner will be effective immediately once a successor general partner is admitted.
- Another sample clause could contain language that states the required limited partners, other than any limited partner who is in default, or a limited partner that is an affiliate of the general partner, can remove the general partner provided a final court order from a court of competent jurisdiction was entered.
The court order must conclude that a “Cause Event” took place and deliver written notice to the general partner in question. The general partner then must notify the limited partners. From there, the required limited partners as defined above would need to appoint a new general partner to replace the outgoing one. The replacement partner would be admitted as a general partner, which would be effective prior to the effective date of the outgoing general partner's removal.
It's important that your partnership removal clause also contains language that discusses the rescinding of any powers, rights, duties, or obligations provided to him or her. In connection with the partner's removal, the remaining limited partners will have the right to purchase the partner's interest at a specified price.
Steps to Remove a Partner
If a partner is looking to leave, this is the easiest and least painful way in most cases. A partner has the right to leave provided it does not breach the partnership agreement and the partnership is one that exists in a definite term.
Removal might also be through mutual agreement. Each partnership and partner are different, so it may take a little coaxing to get them to want to leave. You may offer some financial incentive, like a lucrative buyout offer. In cases where the partner has no desire to leave, it will take more work to get them to go. Understanding the individual partner's mindset and behaviors are key to determining the best route to remove him or her.
In select cases where the partner is committing illegal acts, like embezzling money, you may have to result to court intervention to have them removed. This may be the most challenging method, but it is a very important step if you have someone who is stealing or undercutting the partnership in some way.
Partner Dies and Leaves Share to Spouse
It's not uncommon to have a partner pass away and he or she leaves their partnership share to their spouse. One scenario is the spouse or adult child will step up and take the deceased partner's spot. In that case, you just need to accept the new partner formally and start learning to work together. If there is no one left in the deceased partner's family who can take over the position, you could buy the share out at current market value.
If the partner who passed away had a minimal role in the partnership's day-to-day operations, it may be quick to bring on someone new. However, it could take quite some time if the person was an integral part of the business. It may be difficult to put extra time aside to teach this person or for them to allocate extra time to learn the job. Another less than ideal situation is having to train someone with zero experience who knows nothing about the business in general.
Buying out your deceased partner's share can be difficult if you are trying to determine an accurate value. It's often easier to establish an accurate value in public companies, but a smaller partnership may be more troublesome. Once you've established a number, you may still have another hurdle if you don't have the money to purchase it. You may need to borrow, raise funds, etc. It might be better to find a suitable buyer who can purchase the interest directly from the deceased partner's spouse.
In the worst case scenario, you may have to sell the entire business if there is no heir or suitable investor.
If you need help with removing a partner from a general partnership, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.