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Having a business partner die is a difficult scenario to navigate for any partnership. The emotional and personal toll is 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 you can do to resolve any legal issues that follow.
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How Does a Partnership Work?
Partnerships are easy to start and are common throughout New Zealand, particularly in industries like farming, accounting, and law. In general terms, a partnership is an agreement between two or more people to share ownership of a business. You share the business’ resources, profits and losses with your partners.
A partnership is different from a company because it is not a separate entity, unlike a company. Where a company structure limits your personal liability, a partnership structure results in you being personally and jointly responsible for any debts, along with your other partners. This is called “unlimited liability”. As such, it is important to make sure you trust and understand the people you are considering going into a partnership with.
No Partnership Agreement
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 dissolve and any resources will be split 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 which sets out a clear process to follow if a partner dies, 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.
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Partnership Agreement in Place
Partnership agreements can contain a range of different options that cover what happens if a partner dies. Even if the partnership continues, 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 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.
By preparing a comprehensive partnership agreement, you and your fellow partners have the power to decide what you want to happen in the event of a death to a partner. While you can agree that the partnership will continue, 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. You would then split up the assets of the business 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 automatically dissolves when one 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
- 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, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
No. It depends on whether a partnership agreement – which sets out the process to follow where a partner dies – is in place. These agreements can keep the partnership going and provides the partnership with the freedom and flexibility to follow a process which suits themselves and their business.
The law in New Zealand is that, if there is no partnership agreement, a partnership dissolves if a partner dies. However, a partnership agreement will always take precedence if it does cover the situation where a partner dies.
Yes, you and your partners always have the option of specifying in an agreement that the partnership should dissolve. You would then split up the business’ assets among the remaining partners and the deceased partner’s estate.
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