Administering an Estate Involving a Partnership Business

Winding up the estate of someone who has died is always a big responsibility. However, there are certain factors that can make this task even more complex. One of those factors is whether or not the person who has died was a business owner.

We’ve previously shared information about administering an estate on behalf of someone who was self-employed. In this post, we’re focusing on some of the things you’ll need to know if you’re responsible for winding up the estate of someone who was part of a traditional business partnership.

What is a business partnership?

A business partnership is when two or more people share responsibility for a business. In these cases, any profits and assets are shared between partners, and each partner has to pay tax on their own share. One partner will need to take on the role of the ‘nominated partner’ which means they will take on overall responsibility for completing the partnership tax return.

This type of traditional business partnership is governed by the Partnership Act 1890 and is different from a limited partnership or a limited liability partnership (LLP).

What happens to a partnership business when one partner dies?

The default legal position is for a partnership to be dissolved on the death of one of the partners. In these situations, the personal representatives of the estate would have the right to demand that all assets belonging to the partnership be sold in order to release the share belonging to the person who has died in order that it would form part of their estate.

However, in practice, what happens to a partnership business in the event of a death depends on the terms of the partnership agreement.

A good partnership agreement should clearly set out what should happen to the business under these circumstances. It should give clear instructions to the surviving partner(s) and the personal representatives of the partner who has died.

Often, the partnership agreement will include a mechanism for the business to either pass automatically to the surviving partners or for the surviving partners to buy out the interests of the partner who has died. If the business does continue in this way, the personal representatives will not usually have any powers regarding the ongoing management of the business. (Though, of course, in practice the surviving partners and the personal representatives may be the same people, especially in the case of a family business).

A traditional business partnership is different to a limited liability partnership or a limited company in that there is little separation between the liabilities of the business and the personal liabilities of the individual partners. This means that if the partnership has debts, the estate could be liable for them. In cases such as these, you may well need to seek expert professional advice on how to separate the interests and liabilities of the partnership from the estate.

What will happen to any business bank accounts?

As a partnership does not constitute a legal entity in itself, any business bank accounts held by a partnership business are usually in the joint names of the partners. The law of survivorship means that the contents of a joint bank account will revert to the ownership of the surviving account holders in the event of a death.

Again, this is something that should be covered in a comprehensive partnership agreement.

Are there tax and self-assessment considerations?

As part of the process of administering the estate of someone who was part of a business partnership, you will need to deal with any outstanding personal tax liability.

This will mean completing a self-assessment on behalf of the person who has died for the financial year in which the death happened. The personal representatives may also need to complete a self-assessment for the previous financial year if the person who has died had not yet submitted one.

In some cases, there may also be an inheritance tax liability to consider. A specialist probate solicitor will be able to help determine how to make this as manageable as possible.

Is there anything that business partnerships can do in advance?

No one knows exactly what’s ahead, so it’s vital to take the time to plan for all eventualities. If you’re in a business partnership, ensuring your partnership agreement covers this matter comprehensively can make the difference between your business surviving and your business being automatically dissolved.

A comprehensive partnership agreement will also give surviving partners and personal representatives a great deal of clarity at what is likely to be a very difficult time.

At the very least, your partnership agreement should include provision for what will happen to each partner’s share of the business in the event of their death. This could be:

• An automatic dissolution of the whole business.
• That the share passes to a nominated successor.
• That the share automatically passes to the surviving partners (this may be appropriate in certain types of family business).
• That the surviving partners automatically buy out the share of the partner who has died.
• That the surviving partners have first refusal on the option of buying the share of the person who has died.

It’s also wise for partnership documents to include agreements on what should happen to business bank accounts and other assets, along with clear instructions on liabilities for any debts and how the value of the share of the partner who has died should be determined.

In addition to this, if you’re a partner in a business, it’s also vital to make sure you have written an up to date Will that makes provision for your business interests.

Our team are very experienced in these matters and are available to offer personalised advice on making future plans for both yourself and your business. We can also offer specialist support if you are currently in the process of administering an estate that has business interests.