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Know your Partnership Liabilities

Know your Partnership Liabilities

Liabilities:

• Partners are bound to carry on the business of the firm:
a. To greatest common advantage,
b. Be just and faithful to each other,
c. To render true accounts and full information of all things affecting the firm to any partner, his heir or legal representative.
• If he derives any profits for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm-name, he shall account for that profit and pay it to the firm;
• If he carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.
• Indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.
• Even upon dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm, if done before the dissolution, until public notice is given of the dissolution :
• In unlimited partnership, every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a part¬ner. You can be held personally responsible for another partner’s negligence or carelessness. This means that if your partnership firm is insufficient to meet its financial obligations, you may have to use your personal assets to pay off debtors, even though you personally may not be at fault.

The last mentioned clause can be a big dampener for entering into a partnership, especially if you have insufficient capital. In such a scenario, you might be better served by a limited partnership. Unlike a general partner, who is personally responsible for all debts and obligations of the partnership, a limited partner can lose only the amount of capital he has invested in the business. On the down side, he has relatively little power within the partnership because he is not allowed to be actively involved in the management of the business; he is merely a financial contributor. Nevertheless, he has the right to be informed of all business matters relating to the company and to share in its profits.

Before entering into a partnership, weight all the pros and cons. And also, since each state has specific laws on the formation and dissolution of partnerships, as well as laws regarding the legal responsibilities of each partner, business owners are well advised to consult an attorney and a tax accountant before establishing a partnership.

Know your Partnership Liabilities

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