How to dissolve a partnership and what to do next
The three of us who founded Technically Philly dissolved our partnership at the end of last year. But it was good news.
Moving away from the general partnership we launched in early 2009, we’ve incorporated as an S-Corporation in the Commonwealth of Pennsylvania, for better protection against liability, losses and for better treatment by the federal government (though, as I understand it, if we were to ever sell this thing, it’s a less desirable designation).
That means we closed a bank account, tossed out our partnership agreement in lieu of an operation agreement and started anew of sorts. In our case, dissolving our partnership coincided with our new, dusted off business plan for Technically Media Inc., our parent publishing consultancy that oversees TP.
I put considerable thought into the organization of our business so as to make this inevitable step forward as painless as possible. For others it might be obvious, but if it isn’t for you, below I share some lessons and the steps we took.
Here are some of those take aways:
- We saw our business in four phases: (1) the starting phase, during which all three of us were doing other things and so it was all sweat equity, though a little money was brought in; (2) the building phase, beginning in June when Sean came on full-time as an independent contractor; (3) the growing phase, beginning Dec. 6, 2010 when I joined Sean on full-time and we made this push to incorporation and coming on as salaried employees of the S-Corp and (4) the next phase, in which whatever next big move has to happen.
- We tracked our hours: Beginning in phase two, knowing we need a metric to divvy up money, even though we weren’t yet sure how, we tracked our hourly outputs on a Google doc. So, when it came time to splitting money, it was a simple case of divvying by proportional hours, and subtracting any money that we had already taken out (like, for example, Sean’s pay).
- Every hour was equal: This was an important decision. All three of us were doing different things and playing slightly different roles and, we realized, some of those roles were simply more directly lucrative to the business than others. Still, none of succeeded if it wasn’t for the other two, so we counted all of our hour outputs the same. No weighting hours or special treatment. As your business grows, this is something that may not always be possible.
- We closed out reimbursements and debt: First things first, square away anything the partnership owes to anyone, including the partners.
- Do the math and make sure everyone agrees: Using our hour breakdown, we divided the money up proportionally and closed out the partnership account.
- Prepare for taxes: Depending on your circumstance, that final partnership disbursement can be seen as taxable 1099 income, so prepare by knocking at least a third of it off the table. If there are any large business expenses that can be made before closing out the partnership that makes sense, do so.
- Invest or other next steps: For the three of us, dissolving the partnership was just to incorporate, so we invested a large portion of the money we had made back into a new account, each of us investing the same total.