Running a business with a partner can be a fantastic way to share the workload and success. But what happens if one partner sadly passes away? This is a question many business partners don’t consider, but it’s an important one to have an answer to
There are two main types of partnerships in the UK:
- Ordinary partnerships: These are the classic partnerships you might think of, established under the Partnership Act 1890. Partners share all the profits, responsibilities, and risks – including debts.
- Limited liability partnerships (LLPs): These offer similar flexibility to ordinary partnerships, but with a key difference: limited liability. In an LLP, each partner’s financial risk is limited to the amount they invested in the business.
The big difference between these two types comes into play when a partner dies, resigns, or becomes bankrupt. Here’s what you need to know:
Ordinary Partnerships:
- Dissolution by Default: Unless there’s a partnership agreement stating otherwise, the death of a partner automatically dissolves the ordinary partnership. This means the business, as originally formed, ceases to exist.
- Planning Makes Perfect: To avoid this unwanted disruption, most partnerships will have a written agreement outlining what happens in such situations. This agreement can allow the partnership to continue with the remaining partners.
- No Agreement, No Business? If there’s no agreement, the remaining partners have two options: reach an agreement on how the business will be handled moving forward, or apply to the court to formally dissolve the partnership. Remember, a partnership needs at least two members, so if only one partner remains, the business automatically dissolves.
Taxes and Other Considerations:
- Terminal Loss Relief and Overlap Relief: For tax purposes, the deceased partner’s estate is treated similarly to a sole trader ceasing business.
- Profits and Interest: If there’s no partnership agreement, the deceased partner’s estate is entitled to either a share of the profits earned after their death or 5% annual interest on the value of their share until it’s paid out.
- Assets and Allowances: Assets owned by the partnership might be considered “disposed of” and then immediately reacquired by the remaining partners at market value. This can potentially trigger tax implications.
- Inheritance Tax: The value of the deceased partner’s share is considered part of their estate, but business property relief usually applies, meaning there’s typically no inheritance tax to pay.
Key Takeaway:
Having a clear partnership agreement in place is vital for the smooth running of your business, especially when facing unexpected circumstances like the death of a partner. This agreement can help avoid unnecessary legal complications and ensure the future of your business.
Further Resources:
- S42 Partnership Act 1890
- Statement of Practice D12
