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 if one of your business partners passes away.

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. 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?

If you and your business partner both signed a written partnership agreement when starting the business, there will usually be a clause setting out what would happen on 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. 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.

What Happens if I Have a Buy-Sell Agreement?

If you have a buy-sell agreement in place, this will likely 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. 

A buy-sell agreement is typically 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 Don’t Have a Partnership Agreement?

If you did not create a written partnership agreement with your business partner, then 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. This outcome may not be what either of you had intended to happen when you first started your business together, particularly because of the impact on your finances and on having to wind up the business. 

Key Takeaways

It is a difficult time when a business partner passes away. 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.

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