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A business partner passing away can be tough both personally and professionally. The succession of your business partnership after the passing of a business partner will depend on a range of factors. This article will explain what will happen to your partnership in the event that your business partner dies.

What Is a Partnership?

A partnership is an association of individuals that come together to carry on a business. In a partnership structure, each partner is personally responsible for the business’ 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 is unable to pay a debt that 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. Not only will this agreement detail the overall roles and responsibilities of each partner, but there will usually be a clause outlining the process in the occurrence of death or permanent disability.

Often the partnership agreement will provide for 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 an heir; or
  • an option for you to buy the share of the partnership using a financial formula or fair market value assessment.

Even with a partnership agreement in place, you may still want to close down the partnership. If you do not want 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 an heir of your partner’s estate to take their place.

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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. Most legislation states that the partnership will end upon the death or bankruptcy of any partner.

If your partner dies, you 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 have a great impact on 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.

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.

While LegalVision cannot assist with succession planning, you can contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page if you have any questions about setting up a partnership.

Frequently Asked Questions

What is a partnership agreement?

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.

What happens 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. Most legislation states that the partnership will end upon the death or bankruptcy of any partner.

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