Preparing your partnership business for the unexpected

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In these very difficult times for businesses and the people whose livelihoods depend on them, the emphasis is on putting in place measures to keep a business running in the event the unexpected happens to one of the partners.

If you are a partnership business (i.e. not a registered incorporated company ‘Limited’ or ‘Ltd’ or a registered Limited Liability Partnership ‘LLP’) and you do not have an express partnership agreement in place then your partnership is governed by the Partnership Act 1890. This means that certain events automatically result in a ‘general dissolution’ of the partnership business. A general dissolution leads to the winding up of the business and assets. Once all creditors and other liabilities have been satisfied, the balance of the assets are shared between the partners and the business, the partnership is dissolved.

Understandably, many partnership businesses have this on their ‘to do’ list but may have decided to put it on hold in the current climate. Sadly, however, in these uncertain times, this may be worth considering sooner rather than later.

Dissolution events

Any partnership agreement should be drafted to reflect your business and be as complex, stringent or flexible as your business needs. In the absence of a partnership agreement, a general dissolution of the partnership will occur on:

  1. The death of any partner; or
  2. The bankruptcy of any partner

There are others, such as by agreement of the partners and an application to the court, but generally we find that the main drivers for our clients’ requesting a partnership agreement is to exclude the two automatic dissolution events of the Partnership Act 1890 listed above.

Death of a partner

A partnership agreement can set out a process for the bereaved family and the business partners to follow in the event of the death of a partner of the business. Doing so can provide certainty for the family and allow business continuity. In a partnership of two, providing that it’s in accordance with the partnership agreement, the surviving partner can continue with the executors of the deceased partner’s estate. In such circumstances, either new partners will be admitted in accordance with the partnership agreement or the surviving partner will continue a sole trader.

Bankruptcy of a partner

A partnership business will be dissolved on the date of a bankruptcy order of one of the partners which will lead to a winding up of the business and assets.

If you require further information on the preparation of a partnership agreement or insolvency, please don’t hesitate to contact us.