What you don’t know about partnerships can hurt you – Part III

Previously I covered the ease with which you can find yourself in a partnership and how partners can bind co-partners without their knowledge or approval. Today I will highlight a partner’s liability obligations which I hope will underline the importance of actively managing your partnership relationship.

In the eyes of the law, a partnership is the same legal entity as each of the partners. What this means is that the law does not treat a partner or its partnership differently. For example, when it comes to taxes, you do not file a separate tax return for your partnership as you would for a corporation. You would record your share of the profits (or losses) from the venture in your personal tax returns and apply these against your other personal income.

Similarly, since a partner is the same legal entity as the partnership, the law does not differentiate between the assets of the partnership and the individual partners’ individual assets. This makes it possible for any individual partner to encumber what should be the company’s property against personal loans that have nothing to do with the company.

Again, when it comes to fulfilling the company’s liabilities or repaying its debts, the lack of distinction between the company’s assets and the partner’s assets means that the company’s creditor may look to the partners’ personal assets to satisfy the debt. This is different from the case of a corporation where the individual shareowner’s assets are protected from the corporation’s liabilities.

This brings us to the concept of “joint and several” liability. This means that if the company is in debt, a creditor can pursue any one partner for the whole amount of the debt making this partner wholly responsible for the debt. This partner can bring an action against the other partners to recover their share of the debt, but is still responsible for paying the creditor the whole amount whether or not she recovers her co-partners’ share. Effectively, you could be put in a situation where you are responsible for all of the company’s debts irrespective of your co-partners’ roles in the company.

Entering into a partnership can put your personal assets at risk for your company’s liabilities. In the next related posted, I will list some ways in which you can manage your partnership to ensure that you and the company are protected as much as possible under the partnership arrangement.

Sapna Mahboobani is a business and technology lawyer at Sapna Law Professional Corporation. If you would like her to advise you on your rights and obligations under a partnership, please feel free to contact her and she will be happy to discuss with you.

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About Sapna Law

I am a business and technology lawyer and founder of Sapna Law in Toronto, Canada. I work with tech companies at all stages - from start-up to well established, advising on corporate/commercial and technology law issues.
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