Trying to start a business with limited capital? The general partnership can make it happen. The general partnership structure is a good opportunity for company founders to bring their business dreams to life by finally starting their company. According to the definition, general partners share everything: the management, profits, and losses. What exactly is a general partnership, and when is it...
Who is liable for third-party claims in a general partnership? At the end of the day, as is the case with all partnerships, the partners must personally vouch with their entire assets (up to the seizure limit) for claims against the company. Nevertheless, it is still possible to differentiate between two cases in liability questions in connection with a general partnership:
- General partnership as a subject of liability
- General partnership partners as liability subjects
A liability subject is the target of a creditor’s claim.
The general partnership as the subject of liability
The general partnership does not have its own legal personality (it is not a “legal” person). However, it is party capable and can be registered under the company name (legally: “company”) and…
- Act as a legally independent entity
- Acquire rights and obligations
- Own property
- Incur liabilities
- Be sued
Claims against a general partnership are legally separate from claims against general partners. If a creditor has a claim against the general partnership, then the company is the liable party. A possible execution is directed against the assets of the general partnership, and for this purpose a debt instrument is also required which is directed against the general partnership. With a title against all partners, demands cannot be interspersed among the partners against each other.
General partners as liability subjects
As mentioned above, all partners in a general partnership are liable with their entire assets for general partnership liabilities, namely …
- Primary and immediate
This cannot be restricted by agreements with third parties. Due to the primary, direct liability, a general partnership creditor can address their claim directly to general partners without first having to claim against the company. In this respect, the partners are liable. However, they can refuse to pay if the general partnership has the right to contest the underlying legal transaction or if the claim can be set off against a due claim of the company. This means the legality of the claim against the partners results from the legal relationship with the company.
The consequence of joint and shared liability is that, if necessary, each partner in a general partnership must answer not only for part of the liability, but for the entire claim. However, the creditor may only demand payment once.
A partner who satisfies the general partnership’s creditor’s claim can be compensated by the company for the expenses incurred.
In practice, it is recommended that creditors pursue special claims against both the general partnership and the individual partner, in the case of enforcement, separate debt instruments are required in order to be able to enforce the general partnership in the assets of the different legal entities.
Special features pertaining to general partners’ liability
With regard to the liability of general partners, the law provides for special regulations if partners leave the general partnership, if a new one joins or if the company is dissolved.
Entry of a new partner
If a new partner joins an existing general partnership, they are liable for all company liabilities incurred before their joining.
Withdrawal of a partner
If a partner decides to quit a general partnership, they continue to be liable for any debts incurred during their time as a partner and up to five years after their departure.
Liability once a general partnership has been dissolved
If a general partnership is dissolved by a partner resolution, for example, they will continue to be liable for the company’s debts with their private assets. This liability usually also lasts for five years.
It is important to bear in mind that in the event of a legal dispute, any terms set out within the articles of association are given consideration over state laws. State laws concerning general partnership liability generally exist to clarify in the case of there being no articles of association when the partnership is founded, or if the articles of association do not contain provisions for a certain liability scenario. This is why it is of the utmost importance that comprehensive articles of association are drawn up before partners get involved in a general partnership. If you are unconfident about your ability to draw up an articles of association agreement, or have questions pertaining to information contained in one, the best course of action is to consult a legal professional to ensure that you are legally covered in all cases.