Occasionally a court decision seems so obvious that it is difficult to understand why the issue was disputed. In Corrales v. Corrales, the California Court of Appeal held that a partnership cannot exist without two or more partners. This common sense conclusion has an important effect on the rights of former partners.
Under the California Revised Uniform Partnership Act, a partner is permitted to “disassociate” from the partnership. The partnership must then buy out the disassociated partner’s interest. This process assumes, however, that the partnership continues to exist after the disassociation.
Because a partnership requires at least two partners, if a disassociation leaves only one remaining partner, the partnership’s business must be wound up and dissolved. In the Corrales case, one partner disassociated from a two-person partnership. The partners then litigated the buy-out value. On appeal, the court concluded that the partners were litigating the wrong issue. Since the disassociation left only one partner, the partnership was dissolved and had to be wound up — the partnership had to cease its business, pay its creditors, equalize the partners’ investments, and distribute any proceeds. One person could not continue as a partnership.
The best way to avoid unpleasant surprises, like the one experienced by the partners in Corrales, is to obtain a well drafted partnership agreement that clearly sets outs the partners’ rights and obligations and prevents the unintentional dissolution of the partnership.