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Understanding personal liability in Partnerships
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Partnerships vs Limited Liability Partnership (LLP)
If your business is structured by way of a limited liability partnership (LLP), its members have limited liability meaning their liability is limited to the value of their investment in the partnership.
This is differs from partners in standard partnership businesses who are ‘jointly and severally’ liable for all liabilities within the business – namely outstanding debts and any company obligations. If you are a member in a standard business partnership, the issue of joint and several liability is more pertinent.
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You are legally bound to any business transactions made any of your partners, just as they are bound by any transactions you make, and you can be held personally liable for those actions. For example, if your partner takes out a risky and misguided high interest loan on behalf of the partnership, you can be held personally responsible for the debt should the loan go unpaid.
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Joint and Several Liability is a legal phrase where two or more people within a partnership are joint and severally liable for all the debts incurred within the business.
This means creditors are legally entitled to chase all partners involved in the business for the full amount owed. Therefore, creditors can pursue other partners for full payment if they are not able to receive payment from another partner. Where income tax is concerned, each partner will be taxed on their own share of the business profits.
Joint and several liability will apply 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
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The legal rights of each partner can be documented in a partnership agreement and although there isn’t a legal requirement to draw up this agreement, it is highly recommended that you have your own partnership agreement in place. Without a partnership agreement in place, it is impossible to expel partners, to control the distribution of profits or to even force partners to actually come to work. A partnership agreement truly is an essential piece of documentation.
Without a partnership agreement in place, insolvency practitioners like ourselves will revert back to the Partnership Act 1890 (government legislation) which is referred to in these circumstances as a ‘partnership at will’. This is not a stable organisational structure and means:
- Partners are treated equally in the sharing of workload, capital, assets and profits irrespective of workload efforts or how much capital is injected into the business.
- Partners are jointly and severally liable when the business incurs liabilities which means ALL partners are as liable as each other if one partner breaches a contract
- Dissolution is automatically started upon the death or bankruptcy of a partner
It must be noted that any partner exiting the business could be liable for debts incurred after they have left UNLESS they provide the required notice to the partnership’s creditors. This individual must also be removed from the partnership’s website, stationery and any other documentation that could be seen by customers.
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The whole premise of a business partnership is that individual partners or members are fully liable for the partnership debts if the partnership cannot meet them. This means that if one partner is declared bankrupt, creditors can chase the other partners for all the outstanding debt.
Bankruptcy can be a complex subject and you should take advice from a local insolvency practitioner.
If your business partnership in suffering financially and you would like to know more about joint and several liability in a partnership and company debt liabilities in a partnership, you can arrange a free consultation with one of our licensed insolvency practitioners in your area. Alternatively you can call us for free, immediate advice.
Further Reading on Understanding personal liability in Partnerships
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