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How does the withdrawal of a partner impact a business?

On Behalf of | Jul 8, 2024 | Business Law

Many New York businesses are organized as partnerships. This is an effective strategy for running a business in several ways. It can let individuals of different backgrounds and skill sets work together to advance in ways they otherwise would not be able to; it can give the business and infusion of cash making it easier to operate and invest; it shares the financial risk; and it can bring fresh ideas.

Despite these advantages, partnerships have their pitfalls, and they can simply run their course. A partner – general or limited – might want to leave the partnership or be asked to leave by the other partners. Knowing what the law says when partners withdraw is essential to moving forward.

What happens if a general or limited partner withdraws?

The law has separate sections for when a general partner withdraws and when a limited partner withdraws. The fundamental difference between a general partner and a limited partner is about influence in the business. The general partner has management control and is fully responsible for the financial issues related to the business. The limited partner is not part of management and their liability is based on how much they have invested.

A general partner’s withdrawal is more complex. They can withdraw once they have informed the other partners of the plan to do so in writing. Still, their withdrawal must be allowed based on the partnership agreement.

Limited partnerships have the right to recovery from the general partner who is leaving. The agreement should dictate these terms.

For a limited partner, the withdrawal can be based on events that were detailed in the partnership agreement. Limited partners are generally not allowed to withdraw before the limited partnership is wound down or dissolved.

Know how a partner’s withdrawal will affect the business

In some instances, a partner’s withdrawal will lead to the end of the business as it cannot operate without that person. In others, the business continues and the remaining partners either proceed as is or look for options.

Since these issues can stoke major changes within the business and alter how it is perceived and operates, it is imperative to understand how to address them under business formation and planning. Having assistance to seamlessly move on requires experienced guidance.