Members of a partnership often need to transfer some or all of their stake to a new partner. Doing so can be a delicate process because it impacts the partnership as a whole, not just the seller and buyer.
To make the transaction as transparent as possible and to satisfy potential requirements in the partnership articles, the transfer should be recorded in an Assignment of Partnership Interest. As the document's name implies, its successful execution transfers a portion of the interest in the partnership from a current partner to a new partner.
An Assignment of Partnership Interest is a legal document establishing the terms under which stake in a partnership is transferred from an assignor to an assignee. In other words, the new partner (assignee) acquires the right to receive benefits from the partnership per the stake granted.
The particulars of the Assignment of Partnership respond, in large part, to the type of partnership in question. In some cases, the Partnership Agreement under which the partnership is formed doesn't allow for a transfer of interest to new members or does so only under specific circumstances.
It's also worth noting that a partnership carries both rights and responsibilities. A new partner who receives an interest in the partnership assumes all the Partnership Agreement obligations, including liabilities. However, some states place limitations on assignees' rights that don't recognize them on equal footing as the founding partners.
Depending on your state, an Assignment of Partnership Interest may also be known as:
Transfer of Partnership Interest
Partnership Interest Transfer Form
Transfer of Share in Partnership
Most of the time, an Assignment of Partnership Interest is drafted by a partnership member who's looking to transfer their stake in a partnership. However, the interest assignee could also create the form if they believe specific clauses need to be included.
Other current members of the partnership are also typically involved in creating the document to ensure it's in line with the terms established in the Partnership Agreement. The terms of the agreement frequently place restrictions on the type and amount of interest transferred by each partner.
Situations calling for a transfer of interest may include the business's cash flow requirements, a need to reallocate business assets, changes in the overall partnership strategy, and changes in the regulatory landscape, among others.
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An Assignment of Partnership Interest needs to satisfy several parties. The assignor and assignee need to have their rights protected, and it must fall within the terms of the original Partnership Agreement. It's essential to use a form addressing all the details involved.
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To create your document, please provide:
Assignor: Full name and address of the partner transferring the business interest
Assignee: Full name and address of the incoming partner receiving the business interest
Partnership Details: Legal name and address of the partnership in which interest is being transferred, along with business purposes and other details
Remaining Partners: Names and addresses of the other members of the partnership
Consideration: Payment that the assignor will receive for the transfer of interest
Closing Date: When the assignment of interest will be executed
Warranties: A section of the Assignment of Partnership Interest clearly stating what the assignor promises are right about the interest and the terms of the partnership
Indemnification clause: A clause releasing each party from responsibility created by the other party's failure to act as the document requires
Implied terms: Terms and clauses including an agreement under law or custom even if they're not spelled out directly in the agreement
Exclusion clauses: A part of an agreement releasing a party from responsibility under a specific circumstance
To be legally enforceable, an Assignment of Partnership Interest must be signed by the assignor, the assignee, and all the remaining members of the partnership. If applicable, witnesses to the signing need to sign the document as well.
The signatures do not need to be notarized to be valid. However, you may choose to notarize the signatures to prevent any challenge arising at a later time.
Once the Assignment of Partnership Interest is signed (and signatures notarized if you so choose), distribute signed copies to every partnership member and the assignee. Keep a copy for your records and make sure the partnership's secretary records the transfer of interest in the minutes of the partnership. In some states, it may be necessary to file a document with the Commissioner of Corporations, and tax liabilities may arise based on the value of the interest.
No. You can choose to notarize the signatures on the assignment document, but it’s not required for it to be legal and valid.
In theory, yes. However, this is not only inadvisable but could also result in legal issues down the line. Without the document to establish each party’s obligations, either may choose to back out of the transaction. Furthermore, it puts the partnership at risk, since the assignee ends up with a controlling stake in the business without explicitly being bound to the terms of the original Partnership Agreement.
When partnership interest is transferred, the assignor’s proceeds are typically treated as a capital gain/loss. But, some or all of the capital gains may end up as ordinary income if the assignor attributes it to unrealized receivables. State and local laws may also play a role and you’re well-advised to consult a tax attorney or CPA licensed to practice in your state.
Yes, the document can be used to transfer a partner’s interest to natural or legal persons in a general sense. However, it should be noted that federal tax audit rules may be affected for a partnership if one or more members is itself a partnership and the original agreement may prohibit this type of transfer specifically.
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