Liability of Partners in Plain English

If you have a successful small business and you run with a partner, what exactly is the liability of partners?

Well, if you set up a partnership agreement, you can spell that out exactly. If you don’t have a partnership agreement or the agreement doesn’t cover a specific issue, your responsibilities and liabilities are pretty darn broad. This is the case if you have a general partnership or even a Professional LLC.

There was a law passed in 1932 called the Partnership Act (oddly enough), which spells it all out. First, every partner has a responsibility to work for the common good of all of the partners, to be honest and fair in general. If any member commits fraud, he or she must compensate the partnership for any and all losses as long as the fraud was committed in the service of the partnership.

If a partner knowingly and willingly causes loss by neglect, he or she will be responsible for that as well. Each partner has to be transparent and fully disclose the business of the partnership to other partners. No secrets. But there are other liabilities, too.

If you have a partner, she is a legal agent of your firm. That means you are (individually and collectively) responsible for any business debts the partner incurs. If a new partner comes on board, she isn’t responsible for losses or claims prior to the date she entered into the partnership.

If a partner dies and the partnership later incurs a debt, that deceased partner’s assets can’t be attached so long as the debt was incurred after the date of death. But a deceased partner is responsible for debts incurred prior to death or retirement.

No partner can open a competing business or use partnership property for personal use. Each partner has the right to manage the business, express his/her opinion and see the books.

If you as partner incur costs in the operation of the business, you have the right to be compensated for those costs. Each partner has the right to continue the operation of the business – baring an agreement, no member can throw another member out. The only exception to this is if your partner is not acting in good faith.

Every partner can inspect the property of the partnership and make sure it’s only being used to benefit the partnership. If you’re a partner, you have the right (and obligation) to share in profits and losses.

For my money, I’d recommend you consider setting up a good partnership agreement. Why leave these issues open for interpretation? Either seek the council of a good business attorney or consider using LegalZoom to spell out the terms of the agreement.