General Partnership & the Death of a Partner

By Jennifer Kiesewetter, J.D.

General Partnership & the Death of a Partner

By Jennifer Kiesewetter, J.D.

Forming a business is exciting—deciding on your name or your logo and working on your product or service. However, if one of your partners dies, you'll need to be prepared for that. This is a topic that most new business owners don't want to address. However, you need to address this and other vital questions, such as capital contribution, decision-making, salaries, and dissolution, at the beginning of your business formation.

Two people sitting with hands crossed across a desk from each other

Partnership Agreement

One important way to plan for these potential business issues is a written partnership agreement. This is a legal document that outlines each person's rights and responsibilities and includes provisions on how the organization will run.

These agreements give all individuals a clear understanding of what will happen when certain situations arise. These agreements are covered and interpreted by state law, so if certain circumstances aren't included or covered sufficiently, state law makes the final decision.

 

Your agreement should contain provisions outlining what happens if a partner dies. For example, it may address the continuation of the business or the dissolution of it after a period. Additionally, it may discuss what happens to the deceased individual's shares.

Continuation of the Partnership

Your agreement or your applicable state law may require the continuation of the business upon a partner's death. However, your deceased partner's estate becomes a transferee of the business. This means that the transferee continues to share in the partnership's profits and losses, just as the deceased person would have if he or she were alive. The transferee, though, cannot participate in any managing or voting.

If the agreement does not transfer the deceased partner's share of the business to the estate, the share is calculated based on the division of the profits and debts of the company, divided among all of the partners, on the day the individual died and paid to the estate if the business's assets are higher than its debts. On the other hand, the partner's estate may owe the business money if the debts are greater than the assets.

Dissolution of the Partnership

Your agreement or state law may require or give you the option to dissolve your partnership after a death. If you obtain a majority vote to terminate the business, you may do so. There may also be a certain number of days or months allowed for you to dissolve the business.

After voting for termination, the business begins winding up its affairs by closing down any open projects, including vendor relationships, employee benefits, or leases, and fulfilling any outstanding obligations. The deceased's partner's estate may not participate in the winding up process, but it can ask a court to have the process supervised.

If you decide to take the steps to dissolve, the profits and debts of the business are divided evenly among all of the partners, including the deceased individual's estate. The only way the profits and liabilities aren't distributed equally is if your agreement calls for another type of distribution.

Preparing for the Death of a Partner

As an individual in a partnership, you need to understand your contribution to the business. You also need to understand your rights and obligations if something happens to you. How will it affect you? How will it affect your family? Do you have a personal estate plan in place?

Although 39 states have adopted the Revised Uniform Partnership Act (RUPA), which governs partnerships and includes provisions on the death of a partner, interpreting state law can be difficult. It's important to have your agreement address what will happen in the event of a death. Doing so helps save you time and gives you comfort knowing that you're making the right decisions in preparation for potentially difficult times in the future.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.