While a partnership agreement is not legally required to establish a partnership’s validity in Arizona, there are many advantages to creating a partnership agreement. If a disagreement or question arises, a partnership agreement can stipulate procedures for managing the conflict. If one or more parties wants to dissolve the partnership, the partners can choose the process for termination and set forth key details for handling the dissolution. Partners can also determine which events trigger a dissolution of the partnership and specify the division of partnership assets and liabilities.
If a partnership agreement exists, then the provisions of the agreement control the termination. In cases where there is no partnership agreement or the partnership agreement omits discussion of termination, then the partners must rely on the Revised Uniform Partnership Act (RUPA), a model statute which has been adopted in nearly every state. Arizona’s RUPA is codified in § 29 -1001 et seq. of the Arizona Revised Statutes (A.R.S.). RUPA applies to limited liability partnerships and general partnerships, but does not govern limited partnerships which are addressed in A.R.S. § 29 – 301 et seq. RUPA sets forth certain provisions with respect to the dissolution of the partnership that are effective if there is no guidance provided in the partnership agreement.
Significantly, RUPA amended the previous model statute by providing that upon a partner’s withdrawal from the partnership, in certain circumstances, the partnership is not automatically terminated. According to RUPA, the partner can be “dissociated” from the partnership while the partnership continues to exist. In specific situations, the dissociation of the partner results in the winding up of the business, such as when the partners unanimously consent to wind up the business in a partnership that was established for a definite term. Otherwise, the dissociation of the partner allows the remaining partners to buy the interests of the exiting partner rather than terminating the partnership. RUPA also provides guidance for the winding up stage of dissolution. The statute provides that when the partnership is liquidated, outside creditors are paid first and then partners who are creditors are paid afterwards. The partners can then claim their capital contributions once all creditors have been paid. After these payments are made, any assets still remaining are distributed according to the provisions of the partnership agreement or as provided in RUPA.
Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your legal matter.