Partnerships - What Happens in a Partnership if One Partner Dies

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If one partner dies, it is no longer a partnership and the survivor becomes a “Liquidating Trustee.” The business, as the partners knew it, ceases to operate.The survivor and the estate of the deceased cannot: draw income, enter into new contracts, accept new orders, and borrow money. The partnership business may continue:
1. Until it has been wound up or re-organized or liquidated
2. If the surviving partner decides to carry on, they are responsible for: any new losses and paying interest and percentage of profits on the deceased’s capital to the estate.

If the deceased did not have a valid will, the process is further complicated, because any partner or their representative can apply to the courts to wind-up the partnership, a successful business could be ordered into a forced liquidation or cheap sale.

If the surviving partner chooses just to reorganize, there are several options:
1. Surviving partner buys out the heirs
Both parties must agree on price and a method to finance the purchase.

2. Heirs buy-out the surviving partner
The heirs must have the experience to operate the business otherwise hiring a business operation manager will be costly and will expose them to unlimited liability.
Of course, both parties must agree on price and a method to finance the purchase.

3. Sale of business to a suitable outsider
A suitable outsider may be difficult to find and he or she must have the cash or access to cash to buy in, acceptable to surviving partner.

4. Rollover to surviving heirs
The heirs must have the experience to operate the business and must obtain clearance from the estate’s executor after debts, taxes and administrative costs have been paid.

All these options can be easy to solve if the partnership has established a properly funded, binding buy-sell agreement prior to the death of a partner. This provides for the most welcome alternative – a willing, knowledgeable buyer with cash who must buy-out the deceased’s partnership interest.

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