Partnerships are where more than one individual forms a working relationship and divides the profits from the business among themselves. This does not have to be done equally and many firms have junior and senior partners where the profits are split depending on seniority and length of service.
A large number of partnerships are simply small businesses run by husbands and wives. They normally split the profits 50/50 and there may be tax savings to be had since limited companies tax all profits whereas partners are entitled to the first £6475 each tax free.
Where these businesses get into financial trouble it is normally relatively simple to propose an offer to creditors as the business and personal lives are so intertwined and the assets of the partners are identical. If the partners are forced into bankruptcy their jointly owned personal assets and the assets of the business form the basis of the bankruptcy estate.
It gets a little more tricky if the partners are friends because no two individuals have exactly the same personal assets. Unfortunately, if the business fails and the assets are insufficient to clear the liabilities the balance of the debts become the liabilities of each individual partner on a joint and several basis. This means that if one partner has no personal assets and the others do, creditors of the partnership can pursue those partners with personal assets for all of the outstanding partnership debts. The partner with no assets can go bankrupt and effectively walk away. Many partners do not understand this when partnerships are formed.
Trading partnerships which have got into difficulty can resolve their problems by proposing a PVA or partnership voluntary arrangement. This can be structured in a fashion whereby the personal assets and liabilities of the individual partners are ringfenced but specalist insolvency knowledge is required and it does depend on the personal circumstances of the individual partners. The partnership trades on, and after the partners have received enough for their living expenses and tax liabilities the remaining profits go to the partnership creditors.
It is also possible for a partner to be insolvent but the partnership itself to be perfectly viable. This normally arises when one of the partners has personal problems unrelated to the business and has incurred substantial personal credit as a result. The insolvent partner can propose an IVA to encompass his/her personal liabilities but the creditors of the partnership must also be notified even if the payments are up to date. A personal insolvency for one partner would normally lead to the dissolution of the partnership.
There are many more angles to partnerships and you should always seek specialist advice if in any doubt.
- In a limited liability partnership (LLP) the situation is similar to that for the insolvency of companies.
- In limited partnerships - rather than LLPs - there must be at least one general partner and while the limited partners lose only their investment, the general partner(s) will be liable without limit for all the outstanding debt. This could lead to personal bankruptcy of the general partner(s).
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