A general partnership is an informal business organization created when two or more people decide to start a business together. Partnerships operate under state law, so the effect of the death of a partner may vary depending on where the business is located. However, 38 states have adopted the Uniform Partnership Act, so there is some consistency across the country.
Most partnerships should consider drafting a partnership agreement when starting their business. An agreement gives all partners a clear understanding of their rights and responsibilities in situations that may arise during the partnership’s existence, such as the death of a partner. In most states, the partnership agreement defines the relationship between partners in most business situations; state law comes into play only in situations the agreement does not cover. It is important to review the partnership agreement first to determine what it requires the remaining partners do after a partner dies.
Partnership Agreement and Partnership Death
A clause in an agreement about the death of a partner should address what happens to the partnership afterward and the rights of the partner's estate in the partnership. Some agreements will have the partnership continue after the death of a partner, while in other agreements the partnership will terminate. If the agreement allows the partnership to continue, generally the estate receives payment based on the decedent's past contributions to the partnership, his share of the partnership's liabilities and past undistributed profits. When drafting a partnership agreement to address this situation, consider which terms make the most sense for your business.
Under the UPA, a partner dissociates from the partnership when he dies. This means that the partnership will continue without the deceased partner. The partner’s estate becomes a transferee of the partnership. A transferee has the right to receive compensation for the deceased partner’s share of the business but cannot participate in running the partnership.
Dissolution of Partnership
If at least half of the surviving members of the partnership vote to dissolve the business within 90 days of the partner’s death, under the UPA the partnership will dissolve. The partnership will continue after deciding to dissolve, but only to complete any outstanding business. The estate may not participate in wrapping up the business, but in its role as a transferee it can ask a court to supervise the business as it winds down.
Estate's Share -- Dissolution
If the business terminates, the assets are all sold and the proceeds are divided amongst the partners and the estate. Then the partnership's outstanding liabilities are divided amongst the partners and the estate. Each partner gets an equal share of the profits and liabilities, unless the partnership agreement says otherwise. If the deceased partner’s share of the proceeds from the partnership sale exceeds his share of the liabilities, the estate receives the difference. If the liabilities exceed the proceeds, the estate must pay the difference.
Estate's Share -- Partnership Continues
Regardless of whether the partnership continues or terminates, the method for calculating what the estate gets is basically the same. The value of the deceased partner's share of the business is based on the proceeds the partnership would have gotten if it had liquidated its assets the day the partner died. If the deceased partner’s share of the business exceeds his share of the liabilities, the estate gets what is left. If the partner’s share of liabilities exceeds his share of the value of the business, the estate must pay the difference. The partnership is required to pay interest on the amount owed to the estate starting the day the partner died.