Understanding-personal-liability-in-Partnerships

Partnerships vs Limited Liability Partnership (LLP)

If your business operates as a limited liability partnership (LLP), the members enjoy limited liability. This implies that their responsibility is confined to the amount they’ve invested in the partnership.

This differs from standard partnership businesses where partners are collectively and individually responsible for all business liabilities, including debts and company obligations. If you are a member of a typical business partnership, the matter of joint and several liability becomes more relevant.

 

Personal liability for debts in a partnership

You have a legal obligation for any business transactions carried out by your partners, just as they are obligated for any transactions you undertake. You can be held personally accountable for these actions. For instance, if your partner secures a risky and misguided high-interest loan for the partnership, you may be personally liable for the debt if the loan remains unpaid.

 

Understanding Joint and Several Liability in partnerships

Joint and Several Liability is a legal term indicating that two or more individuals in a partnership share joint and separate responsibility for all the debts accrued within the business.

This implies that creditors have the legal right to pursue all partners in the business for the entire amount owed. Consequently, if one partner fails to make payment, creditors can seek full payment from other partners. Regarding income tax, each partner will be taxed on their individual share of the business profits.

Joint and several liability becomes applicable to you and your partner(s) if:

  • you have a joint account
  • you have a partnership account
  • two or more people sign a guarantee or a mortgage for a joint liability

 

Understanding Partnership agreements

The legal rights of each partner can be recorded in a partnership agreement. While there isn’t a legal mandate to create such an agreement, it is strongly advised to have one in place. Without a partnership agreement, it becomes impossible to remove partners, regulate profit distribution, or even compel partners to actively participate in work. A partnership agreement is indeed a crucial document.

In the absence of a partnership agreement, professionals dealing with insolvency, like us, would resort to the Partnership Act 1890 (government legislation), termed as a ‘partnership at will’ in such cases. 

This isn’t a stable organizational structure and entails:

  • Partners receive equal treatment in the distribution of workload, capital, assets, and profits, regardless of individual efforts or the amount of capital invested in the business.
  • Partners share joint and several liabilities in the event of business liabilities. This implies that all partners are equally responsible if one partner breaches a contract.
  • Dissolution is automatically initiated upon the death or bankruptcy of a partner.


It’s important to highlight that any partner leaving the business may remain liable for debts incurred after their departure unless they furnish the necessary notice to the partnership’s creditors. Additionally, this person must be removed from the partnership’s website, stationery, and any other documentation visible to customers. 

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How does Bankruptcy work within partnerships?

The fundamental principle of a business partnership is that individual partners or members bear full responsibility for the partnership debts if the partnership is unable to meet them. In the event that one partner is declared bankrupt, creditors have the authority to pursue the other partners for the entire outstanding debt.

Bankruptcy is an intricate matter, and it is advisable to seek guidance from a local insolvency practitioner. 

If your business partnership is facing financial challenges and you wish to gain more insights into joint and several liabilities in a partnership and the debt liabilities in a partnership, you can schedule a free consultation with one of our licensed insolvency practitioners in your area. Alternatively, you can contact us for free and immediate advice.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.