If you’re about to enter into a partnership, it’s important to know what your responsibilities are. In this article, we will answer the question, are partners responsible for partnership debts?
What is a Partnership?
A partnership involves 2 or more people conducting business as co-owners. Further, a partnership is not a separate legal entity (like a company is). The creation of a partnership is relatively informal.
You are not required to have a partnership agreement, however, it is strongly recommended. A partnership agreement will prevent future disputes and complications.
There are 3 different types of Partnerships:
- General Partnership.
- Limited Partnership.
- Incorporated Limited Partnership.
General Partnership
In a general partnership, the partners are equally responsible for the business. Partners share any income and debts equally. Each partner acts as an ‘agent’ for the others. Put simply, this means that each partner is liable for the other partners’ actions.
In the same way, each partner is liable for 100% of partnership debts. Even where one business partner accumulates debt without the approval or involvement of the other partners, all partners will be liable.
This is true even after a partner has left the business. Partners will be held responsible for any debts incurred before they left the business.
As such, it is crucial that you enter into a partnership agreement to avoid disputes and pick business partners you can trust.
If you enter into an already existing partnership, you are only responsible for debt which accumulates once you are a partner.
Limited Partnership
Unlike the general partnership, in a limited partnership, not all partners are liable for debt.
Generally, a limited partnership must have at least one general partner and one limited partner.
The general partner(s) are responsible for the management of the business. They also have unlimited liability for the business debt. In other words, the general partners are 100% responsible for any business debt.
The limited partner(s) are only responsible for a limited amount of the debt. That is to say, their liability is limited to the amount of money that they have brought to the partnership.
Further, limited partners are not liable for the conduct of other partners.
Limited partners tend to be passive investors. They do not have a role in the management of the business.
Incorporated Limited Partnership
An incorporated limited partnership is set up as a company and is used for venture capital investment purposes. As it is a separate legal entity, the level of financial risk has been reduced for limited partners.
Similar to a limited partnership, an incorporated limited partnership also involved general partner(s) and limited partner(s). The limited partners are not responsible for the debts in the partnership.
So, this means that where the business is unable to meet it’s financial obligations, the general partner is personally responsible for the debt.
To read more about incorporated limited partnerships click here.
Conclusion
In all partnerships, the general partners are responsible for the debt of the business. Limited partners, usually passive investors, enjoy less financial risk.
If you have any questions or need assistance to choose the best business structure for your business, you should seek advice from one of our business lawyers.
