Am I responsible for my business partner’s debt?

Traditional partnerships vs limited liability partnerships (LLPs)

A partnership is formed when two or more people come together to run a business and make a profit. There are two ways you can structure the business, either as a traditional partnership or a limited liability partnership (LLP).

Traditional partnership

The setup in a traditional partnership is similar to a sole trader. There is no legal or financial separation between the business and its owners, so if the business is in debt, so are the partners. The creditors can then pursue the partners personally for the money they are owed. 

There are advantages to this type of structure. It’s easier to set up, there are reduced compliance requirements and you can keep your financial information confidential. However, there’s also a big downside. You and your partner(s) are individually liable for all the company’s debts. That can bring significant risks, with one partner able to be pursued by creditors to repay debts accrued by another. 

Limited liability partnership (LLP)

An LLP is similar to a traditional partnership in that two or more people come together to run a business. The big difference is that an LLP is an incorporated company registered at Companies House. That makes the business its own legal and financial entity, separate from its owners. 

LLPs have tax advantages over traditional partnerships, and this type of structure can also enhance the business’s professional standing. However, the biggest plus is that partners in an LLP benefit from limited liability. 

That means the creditors cannot usually pursue the partners personally if the company cannot pay its debts. Each partner is only liable to lose their original investment in the company if it fails. However, partners can become liable for company debts if the business becomes insolvent and they have personally guaranteed a debt or engaged in unlawful or wrongful trading.

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Personal liability for debts in a traditional partnership

In a traditional partnership, all partners are bound by and liable for any financial agreements any partner enters into on behalf of the business. If the business cannot pay the debt, any partner can be pursued personally to make up the shortfall. 

Partners have what is known as ‘joint and severally liability’. That means each partner is individually responsible for the full amount of any debt incurred by the partnership, regardless of their part in incurring it. The creditors can decide to take action against any partner to recover the debt. They might pursue multiple partners or make one partner responsible for paying the debt in full.  

Although the creditors can seek repayment from any partner, the partners have the right to ensure they contribute to the debts fairly based on the terms of their partnership agreement. For example, if one partner contributes more towards a debt than is set out in the partnership agreement, they can take court action against another partner for repayment. That’s why it’s always advisable to put a partnership agreement in place.

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What is a partnership agreement?

A partnership agreement is a legal document that formalises the business’s structure and the roles and responsibilities of its partners. It is usually prepared by a solicitor and helps to facilitate the smooth operation of the business and prevent misunderstandings and conflict.

A partnership agreement sets out:

• How profits and losses will be shared
• Who can enter into contracts on behalf of the firm
• How much debt each partner is liable for
• How the partnership can be dissolved

If you do not put a partnership agreement in place, all partners will be equally liable for debts regardless of their role in running the business or accruing the debt. 

What debts can partners be liable for?

You can be held jointly liable for all the obligations and contractual debts entered into on behalf of the partnership. That means you can be liable for:

• Any debts incurred by any partner acting within the authority conferred on them by the partnership agreement
• Any debts incurred by any partner acting outside of their authority but within the normal course of partnership business
• Any debts arising from the negligence, omission or wrongful act of a partner 
• Any business debts arising from the bankruptcy of a fellow partner 

You can even be liable for debts incurred after you have left the business if you do not provide the required notice to your creditors. 

Need advice?

If your partnership has incurred debts it cannot pay or you are worried about the financial position of your business, we can help. We can assess your circumstances, negotiate with your creditors and explore the various routes to turn your business around. Get in touch for a free, same-day consultation or arrange a face-to-face meeting at one of our 100+ UK offices.