Understanding Partnership Liabilities: What Every Business Owner Should Know

Understanding Partnership Liabilities: What Every Business Owner Should Know

Although entering into a business partnership can be a viable way to provide you with investment capital, it exposes you to liabilities such as financial obligations that may put your assets at risk. You may lose your assets if the company faces litigation due to your business partner’s conduct.

Working with a business dispute lawyer can help you navigate the intricate details of your business agreements and handle any partnership liabilities that may emerge. Understanding partnership liabilities well is also vital for mitigating risk.

Partnership liability refers to sharing debts and losses with your business partner. In other words, it assists business partners in understanding how losses occur and who should be held accountable. It can also apply to those who breach a commercial partnership agreement. Partnership liabilities are sometimes defined as the harm done to another person or business organization by the partnership.

The partnership has a variety of impacts on the partners’ bases. For example, your basis will rise in proportion to your share of the increase in liabilities. If your liabilities decline due to the partnership assuming the liability, the partnership is deemed to have distributed the liability. It additionally lowers the basis of the partnership. Similarly, when you bear partnership obligations, it is seen as a contribution and raises your basis.

The impact of partnership liabilities may differ depending on the form of partnership and your level of participation. Thus, it’s important to note that when attempting to end or terminate a partnership, always seek the legal advice of a business dispute attorney.

Before undertaking a profit venture, you must decide what type of partnership you want to form. There are three types of partnerships:

General Partnership

In a general partnership, general partners have equal legal and financial liability and are jointly liable for the partnership’s debts. They also share profits equally, with the details outlined in a written partnership agreement.

Limited Partnership

Limited partnerships consist of both general and limited liability partnerships. In this type of partnership, at least one of the partners must be a general partner and bear full personal liability for the business. The general partner manages the company and is responsible for making decisions, while the limited partner has no responsibilities because they do not engage in the business’s activities.

Limited Liability Partnership

All partners actively run the business under a limited liability partnership (LLP), but they have limited liability for one another’s activities. While partners are entirely accountable for the company’s financial obligations and legal liabilities, they are not liable for the negligent conduct of their fellow partners. LLPs are commonly used by professionals such as architects, accountants, and lawyers. 

As previously stated, partnership liabilities put your assets at risk. However, with proper partnership management, you can reduce risk and increase the likelihood of a successful partnership.

Once you’ve formed a partnership, it is important to record and document anything that goes against your original operating agreement. This will aid in revising the partnership if necessary.

Additionally, it is important to be actively involved in your business. Failing to regularly communicate with your partners may lead to a business dispute. Have a clear insight into your responsibilities, and meet or re-establish the expectations of your partners.

A business partnership may seem lucrative, but it puts your assets at stake. That’s why you need legal advice from an experienced business dispute lawyer whenever you enter any partnership agreement. Our professional business dispute lawyers have years of experience assisting New York City area and New Jersey businesses with all business disputes. If you require legal assistance with business partnership concerns, contact us.