What is joint and several liability in a business partnership?
A business partnership can be made up of two or more individuals, also known as members, and there are several types of business partnership structure available to use. Partners in a ‘traditional’ business partnership, as opposed to a limited liability partnership (LLP), take on joint and several liability for the debts and obligations of their business whether there is a partnership agreement in place or not.
So what does this mean in practice for the partners concerned?
What does joint and several liability mean?
Although business partners may act independently of each other in taking on work, signing up for new borrowing, or carrying out general business transactions, all partners are liable individually as well as jointly should the partnership incur debts or face legal action.
In reality this can result in bankruptcy for the individual partners, even if the business partnership isn’t insolvent. If one partner is pursued to the point of bankruptcy by creditors, the other partners face the same type of action until the debts are repaid.
If the partnership’s financial situation is such that the business has to be liquidated, the office-holder will also seek to recoup money from the partners personally to repay creditors as far as possible.
No business partner will be excluded from this, which is why it may be worth considering setting up a limited liability partnership structure in some instances - it offers a little more protection for partners on a personal level when compared with a ‘standard partnership.’
When would joint and several liability apply?
In a business partnership, joint and several liability can apply in a number of different circumstances, even after a partner has left the business. If a breach of fiduciary duty has occurred and action is taken against a partner through the courts, other partners may also face joint and several liability for the claimant’s court costs.
When taking on debt, partners agree that the money will be jointly repaid, but also that they will repay it in full or in part as individual members of the partnership. If the partnership has incurred a significant bank overdraft, for example, due to the reckless actions of one partner, all partners are liable for the debt.
It’s not just the actions of a partner that can result in liability for others, however – omissions are equally an issue in a partnership without limited liability. Effectively, joint and several liability means there is one joint liability and a number of several liabilities depending on the number of partners in the business.
If you’re considering setting up a business partnership or would like more information on joint and several liability, we can put you in touch with a qualified local accountant who can guide you further.
Handpicked Accountants have long-established professional relationships with accountants and accountancy practices around the country, and our recommendations are based on practical knowledge of their experience and working practices. Call one of our team to find out more.