Reading time: 6 minutes

Having a business partner die is the worst case scenario for any partnership. The emotional and personal toll are often significant on the remaining partners and the legal consequences are the last thing you want to think about. However, the death of a partner does not have to mean the end of the legal partnership. This article will set out what happens when a partner dies, and what can be done to resolve any legal issues that follow.

How Does a Partnership Work?

Partnerships are easy to start and are common throughout New Zealand, particularly in industries like farming and law. In general terms, a partnership is an agreement between two or more people to share ownership of a business. You share the resources, profits and losses of the business with your partners.

A partnership is different from a company because it is not a separate entity like a company is. Instead, you are personally and jointly responsible for any debts, along with your other partners. This is called “unlimited liability”. Because of this, it is important to make sure you trust and understand the people you are thinking of going into a partnership with.

This risk of liability is also why it is important to have a formal partnership agreement. These agreements are also vital to decide what happens if one of the partners dies.

No Partnership Agreement: What Happens When a Partner Dies?

Under New Zealand law, if there is no partnership agreement, the partnership will dissolve if any of the partners dies. This is to protect the remaining partners in the event of a disagreement as to how the business should continue.

This automatic dissolution also takes effect if there is a partnership agreement but the agreement does not have any process or detail for what happens if a partner dies. If that is the case, a partnership will be dissolved and any resources split up among the surviving partners.

However, the law is clear that this dissolution only takes place if there is no relevant partnership agreement. If there is a valid document, it takes precedence. This means that business partners can decide for themselves what happens if a partner dies, and it does not have to mean the end of the partnership.

Partnership Agreement: What Happens When a Partner Dies?

Partnership agreements can contain a range of different options that cover what happens if a partner dies. Even if the partnership carries on, something will have to occur with the deceased partner’s share of the business. For instance, the:

  • partnership may have the option to select a replacement for the deceased partner;
  • partnership may have the option to “buy out” the share of the deceased partner, potentially using a predetermined way of assessing the value of that share; or 
  • estate or family of the partner might take over their share of the partnership.

There are a variety of possible ways to arrange your partnership agreement and it is beneficial to think and discuss this issue in detail with your partners when the partnership is set up. Different arrangements suit different groups of people.

No matter what the partners prefer, it is almost always preferable to have the flexibility and control provided by a partnership agreement compared to automatic dissolution of the partnership if there is no agreement.

Of course, you and your fellow partners have the power to decide what you want to happen in the event of a death to a partner. You do not necessarily have to keep the partnership going if a partner dies: you always have the option of specifying that the partnership should dissolve, if that is what you think would be best for your situation. The assets of the business would then be split up among the remaining partners and the estate of the deceased partner.

Key Takeaways

It is always a personal and emotional tragedy if a business partner dies. However, it does not have to spell the end of the partnership. It is beneficial to plan for the possibility in advance to avoid that occurring. If you do not have a partnership agreement, a partnership is dissolved if a partner dies. This is to protect the remaining partners in the event of disagreement or ambiguity as to how the business should progress in the aftermath of one partner’s death.

However, a partnership agreement takes precedence over that law if it sets out what should happen if a partner dies. These agreements can keep the partnership going, for instance by allowing the partnership to select a replacement partner, or by “buying out” the deceased partner’s share in the partnership. If you want to know more about how to draft a partnership agreement or discuss your options, call LegalVision’s business lawyers on 0800 005 570 or fill out the form on this page.

FAQs

Does a partnership have to end if a partner dies?

No. It depends on whether a partnership agreement is in place. These agreements set out what should happen if a partner dies. These agreements can keep the partnership going.

What happens if there is no partnership agreement?

The law in New Zealand is that, if there is no partnership agreement, a partnership is dissolved if a partner dies. However, a partnership agreement will always take precedence if it does cover the situation where a partner dies.

What do partnership agreements usually say about what happens when a partner dies?

There is a wide range of possible options depending on how the agreement is drafted. Common options include giving the remaining partners the option to ‘buy out’ the deceased partner, and to reappoint a new partner of their choosing.

Can you choose to dissolve the partnership if a partner dies, even if you have an agreement?

Yes, you and your partners always have the option of specifying in an agreement that the partnership should dissolve. The assets of the business would then be split up among the remaining partners and the estate of the deceased partner.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2019 Top 25 Startups - LinkedIn
  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards