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If you run a business as a partnership, it can be a challenging ordeal if your business partner dies. Aside from mourning the loss of someone close to you, there are also consequences for your business. The death of a partner brings up many questions, like:
- what happens to their share of the business; and
- what rights do your partner’s family have in the business?
This article will provide an overview of the law when your partnership has lost a partner through death.
General Partnerships and Limited Liability Partnerships
A general partnership is a kind of legal business structure that automatically arises when two or more people work together to share in the profits and losses of a business.
A limited liability partnership is a special kind of partnership. This is where the partnership’s business is incorporated and exists as its own legal personality.
The Partnership Agreement
Both kinds of partnerships should have a well-drafted partnership agreement in place. This document should set out the terms and conditions of the partnership, including what happens in the event of a partner’s death. Therefore, the first course of action when determining what a partner’s death means for the partnership would be to review the partnership agreement and see if there is any relevant provision.
Likewise, it is common for any provision regarding the death of a partner to be referenced as part of a wider series of terms. For example, there might be more general terms about the expulsion, removal, and retirement of a partner. In particular, retirement and death are often treated as effectively the same. So, you can determine the “leaving date” from when the partner died.
Also, it is common to include a clause that states how a partner’s death does not automatically dissolve the partnership. Ultimately, this permits the partnership to continue trading after a business partner dies.
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Where There is No Partnership Agreement
If there is no partnership agreement in place, the law will apply terms from the Partnership Act. Under this law, your partnership will automatically dissolve if your partner dies.
This may sound catastrophic. However, it is possible to continue trading under the same name. This will be a “technical dissolution” because, from a strictly legal perspective, the partnership has come to an end.
Where There Are Two Partners
Suppose there are two partners running the business and one dies. By definition, there is now no longer a partnership in place. This is because the law requires two or more persons for a partnership to exist. Therefore, if your business partner dies, technically, your partnership dissolves.
Additionally, your partnership agreement may have a specific term that seeks to preserve the partnership in the event one of two partners dies. In this case, the partnership will pass from the deceased partner to the partner’s Personal Representatives of the partner’s estate. They will then have the option to continue the partnership. Then, if they refuse, the partnership comes to an end.
Liability of a Partner After Their Death
The deceased partner’s estate will be liable for the partnership’s debts until the partnership’s death. An exception is if a term in the partnership agreement says otherwise. In practice, this means that a partnership’s creditors can come after the deceased partner’s estate under certain circumstances. For example, if the partnership is in default of any terms of a loan, the deceased partner’s estate may not be able to escape liability.
Some partnership agreements may have a clause that releases the estate of any liability.
It is prudent to advertise the death of a partner in the Gazette because various agency laws could bind the partnership to any agreement made by the deceased partner that would otherwise still be continuing had the partner not died.
The Deceased Partner’s Will
It is common for a partnership agreement to have a term that permits the partner to transfer their “interest in the partnership” to someone in their will.
The value of this interest in the partnership can be hard to define. Technically, it refers to the share the partner would have received if the partnership was formally dissolved and wound up. In effect, this would be whatever is left over after repaying all the partnership’s debts and then dividing this amount amongst the partners.
Since the value of a partnership share can be imprecise, it may be necessary to instruct a solicitor to advise on the consequence of a partner’s death.
Conflict Between a Will and the Partnership Agreement
There may be a provision in the partnership agreement where the surviving partners have a right to buy the deceased partner’s shares from the estate of the deceased partner.
As such, the partners can assert this right. This is the case even if the will states the partner’s daughter (or anyone else) should receive the share. This is because the partnership agreement is a contract between and among the partners. Likewise, contracts are enforceable against the estate of any deceased person.
Land Owned by the Partnership
Additionally, a partnership may own land. Here, further considerations are in place because land ownership in the UK is unique from owning other property.
Since partnerships cannot own land (remember, partnerships do not have any legal personhood), the law deems that partners hold property in trust for the other partners. Where the property is land, this is a “trust of land.”
Additionally, it is common for all partners to hold the legal title to land. However, there cannot be more than four legal owners in a trust. This is a matter of law. Therefore, depending on how partners hold the beneficial interest, it can have wide-ranging implications for how the partnership’s assets can and cannot pass to the other partners or people named in the deceased partner’s will.
Key Takeaways
Most partnerships, including general and limited liability partnerships, are governed by partnership agreements. This document will set out the terms and conditions governing the partners and their business. If a partner dies, there are often provisions that account for what happens.
In the absence of a partnership agreement, the death of a partnership will automatically dissolve the partnership, though there are ways to continue the partnership’s business. If the partner has left partnership property or their share to another person, you should review this in light of the partnership agreement. Further, where there is a conflict, the partners may have a right against the partner’s estate.
If you need help understanding your next steps if your business partner dies, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
It largely depends on the details of the partnership agreement. If there is no partnership agreement, the partnership automatically comes to an end. From the perspective of the other partners, this may be undesired.
Again, it will depend on the partnership agreement. Additionally, you should review the terms of the will. Where there is any conflict between the agreement and the deceased partner’s will, the partnership agreement will prevail in some cases.
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