Law guide: Business start-up

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Liability of existing partners

Liability of existing partners

Partnership liabilities

Generally, as a partner you'll all be liable for each other's conduct. However, under certain circumstances one partner may be liable for losses caused to the partnership, and may have to compensate the other partners for these losses.

Liability of the partnership

The partners will always be held legally responsible for the acts of all the partners acting together. They'll also be legally responsible for the acts of one partner that were authorised by the other partners.

The other partners could authorise one partner:

  • expressly - by asking the partner to represent the other partners in a particular transaction or type of transaction, e.g. one partner may be asked to enter into contracts to buy trading stock for the business; or
  • implicitly - if the other partners have accepted that the partner will have the authority to represent them in a particular type of transaction, e.g. if you're all actively running the business without setting any limitations on what each partner can do, each partner would implicitly have authority to sell the firm's products in the ordinary course of business.

The partnership can also be legally responsible for acts of one of the partners that they didn't actually authorise, on the basis that it would seem to people outside the partnership (outsiders) that the partner was authorised. This may happen in transactions entered into between the outsider and partner relating to the type of business that the partnership normally carries out, or transactions that an outsider would normally expect a partner to have the authority to enter into on behalf of the partnership.

All the partners will be liable to the outsider in these cases as long as that outsider knew the person they were dealing with was a partner and didn't know or suspect that this partner was acting without the authority of the partnership. In this case, the partner is said to have 'apparent authority', even though he doesn't have actual authority. Apparent authority is enough to make the partnership liable to the outsider. This rule protects outsiders who reasonably believe that the partner they're dealing with has the authority to act for the partnership.

Liability of the partner entering into the transaction

A partner who has entered into the contract with an outsider will always be personally liable to that outsider. The partner and the outsider will both be parties to the contract.

If the partner has acted without actual authority but with apparent authority, the partnership is bound by the transaction the partner has entered into on their behalf with the outsider. The other partners can recoup from that partner any loss they suffer as a result.

Liability of the other partners of the firm

According to the law, all the partners in the partnership at the time when the debts or liabilities are incurred on behalf of the partnership are jointly and individually liable for those debts and liabilities. This means that each partner can be made to pay all the debts of the partnership.

Related services

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  • Partnership agreement
    Compatible region(s): England Wales

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