Summary
- A well-drafted partnership agreement should include provisions for the death of a partner, covering business valuation, options for the deceased’s estate to take over their share, buyout mechanisms, and continuity clauses to avoid automatic dissolution.
- Without a partnership agreement, the relevant state or territory Partnership Act will apply, generally dissolving the partnership immediately upon a partner’s death and requiring surviving partners to assume personal liability for staff entitlements, tax obligations, and the deceased partner’s share of the business.
- A buy-sell agreement, typically funded through insurance policies, can work alongside a partnership agreement to provide a clear and financially supported process for surviving partners to continue the business following a partner’s death or permanent disability.
- This article is a guide to the consequences of a partner’s death for business owners in Australia, explaining how partnership agreements, buy-sell agreements, and state legislation govern the future of the partnership.
- LegalVision is a commercial law firm that specialises in advising clients on partnership law and business structures.
Tips for Businesses
Draft a comprehensive partnership agreement that includes continuity clauses and a clear process for handling a partner’s death before such an event occurs. Consider a buy-sell agreement funded by insurance to provide financial certainty for surviving partners. Notify the Australian Taxation Office of any partner changes within 28 days to meet your legal obligations.
Losing a business partner is both a personal and professional challenge, and the future of your partnership will depend on the agreements you have in place and the applicable law. Planning ahead can make a significant difference to the outcome for everyone involved. This article explains how partnerships handle such situations.
What Is a Partnership?
A partnership is an association of individuals who come together to conduct a business. In a partnership structure, each partner is personally responsible for the business’s debts. Consequently, both profits and losses of the businesses can be shared amongst partners.
Unlike a company, a partnership is not a separate legal entity. Under a partnership structure, you are jointly and individually responsible for the debts of your business partners. This means if one of your business partners cannot pay a debt they have incurred on behalf of the business, you may need to pay this debt yourself.
What Happens if I Have a Partnership Agreement in Place?
When entering into a partnership arrangement, it is always best practice for all parties to sign a written partnership agreement. Such an agreement would usually detail:
- how the business will be controlled, including the overall roles and responsibilities of the partners;
- how the income and losses will be distributed to the partners;
- and, ideally, a clause outlining the process in the occurrence of an unexpected event, including the death or permanent incapacity of a partner.
Often the partnership agreement will provide for the valuation of the business and following, a few different options, including:
- the deceased’s estate taking over their share of the partnership;
- a transfer of the other partner’s share to you on a payment to the estate;
- an option for you to bring on a replacement if the deceased does not have a successor; or
- an option for you to buy a share of the partnership using a financial formula or fair market value assessment.
Is This the End of the Business?
The death of a business partner does not necessarily mean the end of the business. The partnership may be able to continue as a reconstituted partnership if certain conditions are met, including:
- having at least one common partner before and after reconstitution;
- a continuity clause in the partnership agreement; and
- no break in the continuity of the enterprise.
In a two-person partnership, continuity may be possible if the agreement allows the deceased partner’s executor, trustee, or beneficiary to join the partnership. If these conditions are not met, a new partnership may need to be formed, requiring a new Tax File Number and Australian Business Number. It is crucial to inform the Australian Taxation Office of any changes, including the death of a partner, within 28 days and follow the appropriate procedures for tax lodgement and other legal obligations. Alternatively, you could bring in your partner’s estate heir to take their place.
Even with a partnership agreement, you may still want to close the partnership. If you do not wish to continue running the business without your partner, you could consider selling the business or dissolving the partnership. You can liquidate the assets and distribute them accordingly. Alternatively, you could bring in a successor of your partner’s estate to take their place.
What Happens if I Have a Buy-Sell Agreement?
Alternatively, you may have a buy-sell agreement in place. Likewise, this agreement will set out the process to follow if your business partner dies. A buy-sell agreement is typically used in conjunction with your partnership agreement. Typically you and your partner, along with your respective spouses, enter into this agreement to negotiate the terms and conditions of the purchase of the partnership share in the event of death or permanent disability.
Generally, a buy-sell agreement is funded through insurance policies for the relevant trigger events. A buy-sell agreement that supports a partnership agreement provides the remaining business partners with a clear process to follow and an opportunity to continue carrying on the business.
What if I Do Not Have a Partnership Agreement?
If you did not create a written partnership agreement with your business partner, the Partnership Act in your state or territory will apply to regulate what happens to your business.
Generally, most legislation immediately dissolves the partnership following the death or bankruptcy of a partner and following any surviving partner(s):
- assume personal liability for staff entitlements if redundancies occur;
- become responsible for GST and other tax obligations; and
- will then owe your partner’s estate their share of the partnership that accrues at the date of their death.
Notably, this outcome may not be what either of you had intended to happen when you first started your business together. This is particularly because winding up your business will greatly impact your finances.
Consequently, it is always better to have a strong and detailed partnership agreement in place. Indeed, the death of a partner is an uncomfortable topic. However, to ensure all partners’ intentions can manifest in the future, you want to record everything accurately in a partnership agreement.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Key Takeaways
It is a difficult and emotionally exhausting time when a business partner dies. This can become especially stressful if you do not know how this will affect your business. If possible, it is best to plan early on, which can make life much easier in the long run. A properly drawn-up partnership agreement or buy-sell agreement can last many years and give you both peace of mind.
Alternatively, if you have any questions about setting up a partnership, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced business lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
A partnership agreement is a contract between you and the other partners in your business. This contract will outline each partner’s duties and responsibilities to each other and to the business itself. Likewise, a partnership agreement will govern crucial matters that arise in your business, such as making decisions and resolving disputes amongst partners.
If you did not create a written partnership agreement with your business partner, the Partnership Act in your state or territory will apply to regulate what happens to your business. Most legislation states that the partnership will end upon the death or bankruptcy of any partner.
You must inform the Australian Taxation Office of a partner’s death within 28 days and follow the appropriate procedures for tax lodgement and other legal obligations.
Partnership agreements typically provide valuation options including transferring the share to the deceased’s estate, using a financial formula, or conducting a fair market value assessment to determine the share’s worth.
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