You and your partner built the business together, and now one of you wants out. Perhaps the fixed term you agreed to has expired, the particular venture the partnership was formed for has finished, or the working relationship has broken down to the point where the business cannot continue. From the moment that decision is made, a defined process begins. The partnership must be dissolved in a way the law recognises, its affairs wound up, and its registrations closed, before either of you can move on cleanly.
Done properly, the process ends with a written record of the dissolution, a settled division of the firm's assets and debts, a cancelled or transferred business name, and a closed ABN. What you will not get is a "deregistration" of the partnership itself. Partnerships are not registered entities like companies. They come into existence by agreement and end by operation of law once a valid ground for dissolution exists. The paperwork is about winding up the firm and closing the registrations that hang off it, which is why partners often discover years later that an informal "we're done" left them still registered with the ATO.
Before you start: the prerequisites
Work through these before you give any notice or sign anything:
- Your partnership agreement: if one exists, it governs how the partnership can be dissolved. If it does not exist, the default rules in your state or territory's Partnership Act apply instead, so you need to know which regime governs you.
- A valid ground for dissolution: for most partnerships this means notice given by a partner, the expiry of the agreed term, or a court order. The steps below explain each ground.
- An agreed effective date: the date the partnership ends, and a decision about the business: does it close, or continue under one partner?
- A full list of the firm's assets and liabilities: contracts, leases, employees, creditors and insurance policies.
- The details of your registrations: the business name with ASIC, and the ABN, GST, PAYG and other registrations with the ATO.
- A buyout price or valuation approach: needed if one partner is purchasing the other's interest.
The items that trip people up most are the first and the last. A partnership run without a written agreement is governed entirely by default rules, and profit shares that were never written down become the subject of argument the moment the firm ends. A buyout price agreed over coffee is almost guaranteed to be revisited when an independent valuation arrives.
The steps to dissolve a partnership
Check your partnership agreement first
The starting point is always the partnership agreement, because the statutory default rules apply only subject to any agreement between the partners. A well-drafted agreement will specify when the partnership can be dissolved, how much notice a departing partner must give, how the departing partner's interest is valued and paid out, and what happens to the business name, premises and staff. If your agreement contains those terms, you follow them.
If there is no agreement, or it is silent on dissolution, the Partnership Act in your state or territory fills the gap. Every state and territory has one, and they are largely uniform: the Partnership Act 1892 (NSW) (the NSW Act), the Partnership Act 1958 (Vic), the Partnership Act 1891 (Qld), the Partnership Act 1895 (WA) and their equivalents in the other states and territories. The section numbers differ slightly between jurisdictions, but the scheme is the same. The NSW Act is a good reference point, and your own state or territory's Act can be checked on its legislation register.
Establish a valid ground for dissolution
Under s 32 of the NSW Act, a partnership is dissolved in three situations, each subject to any agreement between the partners:
- A fixed term expires: a partnership entered into for a fixed term dissolves by the expiration of that term.
- A single venture ends: a partnership formed for one adventure or undertaking dissolves when that undertaking terminates.
- A partner gives notice: a partnership entered into for an undefined time (a "partnership at will") may be dissolved by any partner giving notice of their intention to the other partners. The dissolution takes effect from the date stated in the notice, or if no date is stated, from the date the notice is communicated.
The at-will notice is the ground most departing partners rely on. Under s 26 of the NSW Act, where no fixed term has been agreed, any partner may determine the partnership at any time by giving notice to all the other partners. Where there are only two partners, notice to the other partner is notice to all. The notice does not have to be in writing under the NSW Act, except where the partnership was constituted by deed, in which case a notice signed by the departing partner is required (s 26(2)). Even where writing is not legally required, a written, dated notice is the only safe way to fix the effective date, and that date drives everything that follows.
A partner in a fixed-term partnership cannot simply give notice and walk away. Ending a fixed-term partnership early, outside the terms of the agreement, is a breach of the partnership contract and can expose the departing partner to a claim for the loss caused.
Other grounds operate automatically or by application:
- Death or bankruptcy of a partner: subject to any agreement, the partnership is dissolved as regards all the partners by the death or bankruptcy of any partner (s 33).
- Illegality: a partnership is dissolved in every case by an event that makes it unlawful for the business to be carried on, or for the members to carry it on in partnership (s 34).
- A court order: under s 35, a partner can apply to the court for a dissolution order where another partner is of unsound mind or permanently incapable of performing their part of the contract, has been guilty of conduct calculated to prejudicially affect the business, or wilfully or persistently breaches the agreement. A court may also order dissolution where the business can only be carried on at a loss, or where circumstances have arisen that make it just and equitable to dissolve the partnership (s 35(f)).
Wind up the firm's affairs and settle the accounts
Once the partnership is dissolved, the business of the firm must be wound up. The partners' authority does not end abruptly. Under s 38 of the NSW Act, each partner's authority to bind the firm continues after dissolution so far as is necessary to wind up the affairs of the partnership and complete transactions begun but unfinished at the time of dissolution, but not otherwise. New trading after dissolution falls outside that authority, and a partner who signs new contracts can end up personally liable on them.
The winding-up order is set by the Act. Every partner is entitled to have the property of the partnership applied in payment of the firm's debts and liabilities, with the surplus applied in payment of what is due to each partner (s 39). The rule for distribution on final settlement of accounts under s 44 is:
- losses, including losses and deficiencies of capital, are paid first out of profits, next out of capital, and lastly by the partners individually in the proportion in which they shared profits; and
- the assets of the firm are applied in a set order: first, in paying the debts and liabilities of the firm to people who are not partners; then in paying each partner what is due for advances or loans; then in paying each partner their capital; and finally, the ultimate residue is divided among the partners in the proportion in which profits were divisible.
In practical terms, winding up involves preparing final accounts, notifying creditors and collecting debts, selling or transferring assets, dealing with employees and their entitlements, closing bank accounts, cancelling insurance, and transferring or ending contracts and leases. Final tax returns and business activity statements need to be lodged, and the partnership's profit or loss for the final period allocated to the partners.
Update your business name, ABN and tax registrations
The administrative work happens in a particular order because the registrations are linked. If the partnership traded under a registered business name, cancel it through ASIC Connect when the business is closing, or arrange a transfer if a continuing partner is taking over. If the partnership is continuing with a changed membership, you must notify ASIC of the added or removed partner, but only where the partnership agreement allows the change.
The ATO side is equally important. The ATO requires you to notify it of changes to your details on the Australian Business Register within 28 days. If the business has permanently closed, you need to cancel the ABN and cancel associated registrations such as GST and PAYG withholding. Where one partner leaves and the business continues, the ATO treats the change in the makeup of the partnership as a dissolution and the formation of a new partnership, which has its own tax consequences.
Finally, check whether your state or territory imposes additional requirements. Some jurisdictions require a notice of dissolution to be published, for example in a government gazette or a newspaper, and the business.gov.au guidance on dissolving a partnership lists the relevant state and territory business authorities to check with.
Document the dissolution in a deed of dissolution
Even where the partnership dissolves by operation of law, the terms of the split should be recorded in a written deed of dissolution. The deed should set out the effective date, how the assets (including goodwill and intellectual property) are divided or priced in a buyout, who is responsible for each outstanding liability, what happens to contracts, customers and employees, and who takes the business name. It should also deal with the return of partnership property and records, and any ongoing restraints, such as non-compete, confidentiality and non-disparagement obligations on the departing partner.
The deed is the document you show the bank, the ATO and any buyer of the business. It is also the document that prevents the split from being relitigated later, when memories of what was agreed have faded. Without it, the terms of the division are a matter of assertion, and the default distribution rules in the Act apply to whatever the partners cannot agree on.
Where partners typically get held up
The sticking points below are where a straightforward dissolution turns into a dispute, a personal liability, or a lingering registration:
- Trading after the notice is given: once dissolution takes effect, a partner's authority is limited to winding up under s 38. Continuing to trade and sign new contracts can bind that partner personally, not the firm.
- Relying on a verbal departure: a notice that is not written and dated makes the effective date contestable, and the effective date drives valuation, the cut-off for the firm's liabilities and the tax position.
- Forgetting that creditors come first: dissolution does not extinguish the firm's debts. Firm assets are applied to pay creditors before anything is distributed to partners (s 44), and partners remain personally liable for debts incurred while they were partners. Notifying creditors and settling accounts is not optional paperwork.
- Assuming the registrations close themselves: the business name and ABN stay live until someone cancels them, and the ATO expects changes on the Australian Business Register within 28 days. An un-cancelled ABN keeps the partnership visible to the ATO, and can generate obligations to lodge even after trading has stopped.
When you need a lawyer's help
Most straightforward dissolutions are handled by the partners themselves, but a legal practitioner adds value at several specific points. A lawyer will review the partnership agreement and advise on whether a valid ground for dissolution exists and which procedure your state's Act requires, which matters more than people expect when the partnership was formed without an agreement. They will draft and serve the dissolution notice so the effective date is fixed beyond argument, and negotiate the buyout, including the valuation of goodwill, intellectual property and the business name.
Where the partners are deadlocked, a lawyer will prepare and run the court application for a just and equitable dissolution under s 35(f). The Murray v Feros [2019] NSWSC 260 decision is a working example: the Supreme Court of New South Wales ordered the dissolution of pharmacy partnerships under that ground, and appointed receivers to prepare the sale of the partnership assets and account for the proceeds. That case also illustrates the cost of getting here. Court-ordered dissolutions are time-consuming and expensive, and the assets are typically sold rather than preserved.
A lawyer will also draft the deed of dissolution and the ancillary documents, such as the transfer of the business name, and will coordinate with the accountant on the tax side, including capital gains, trading stock, GST and the reconstitution rules that apply when one partner leaves and the business continues.
Fix the effective date of dissolution
The single thing most likely to determine whether your dissolution goes smoothly is the effective date, and the written record of it. The date appears in the notice given under the Act, and every step that follows hangs off it: the valuation of the departing partner's interest, the cut-off for the firm's liabilities, the tax treatment of the final period, and the terms of the deed. If the date is not fixed in writing before anything else happens, it becomes contestable, and a dispute about when the partnership ended can stall the entire process.
The process as a whole is straightforward to describe and harder to execute. Check the partnership agreement, or the default rules of your state's Partnership Act if there is none. Establish a valid ground, in writing and dated. Wind up the firm's affairs, paying creditors before partners in the order the Act sets out. Cancel or transfer the business name and ABN, and notify the ATO within 28 days. Then record the whole arrangement in a deed of dissolution. Where partners cannot agree on any of these, a lawyer's involvement early is far cheaper than a court application later.