When a Business Partner Dies: What Happens to the Partnership

The death of a business partner is both a personal bereavement and a potential business crisis. What happens next depends almost entirely on what is written in the partnership deed — or, if there is no deed, on default legislation that may produce results nobody wanted. This guide explains the legal position and the practical steps for surviving partners and executors.

General partnerships: the Partnership Act 1890 default position

The Partnership Act 1890 is the statute that governs general partnerships in England and Wales where there is no written partnership agreement (or where the agreement does not address a particular situation). The Act's default position on the death of a partner is stark: the partnership is dissolved.

Under section 33 of the Partnership Act 1890, subject to any agreement between the partners, every partnership is dissolved by the death of any partner. Dissolution does not mean the business immediately ceases — it means the partnership enters a winding-up process. The business continues only for the purposes of winding up: completing work in progress, collecting debts, paying creditors, and distributing the surplus to partners (or their estates).

This default position is often not what anyone actually wants — surviving partners typically want to continue the business without disruption. This is why having a well-drafted partnership deed is so important. In the absence of a deed, the surviving partners and the executor of the deceased partner need to reach agreement on how to proceed, which can be time-consuming and contentious.

If the partnership is dissolved, the surviving partners are entitled to carry on the business to wind it up, but not to take new partners or expand the business. All partners (including the deceased's estate) remain jointly and severally liable for partnership debts incurred before the date of dissolution.

The partnership deed: continuation provisions

Most professional partnerships and any partnership that has sought legal advice on its structure will have a written partnership deed that contains specific provisions for what happens on the death of a partner. These typically include:

• Continuation clause: an express provision that the partnership continues notwithstanding the death of a partner — this is the most fundamental provision and overrides the Partnership Act 1890 default
• Buy-out provisions: a mechanism by which the surviving partners agree to buy the deceased partner's share from the estate, typically within a specified period (e.g., 6 or 12 months of death)
• Valuation mechanism: how the deceased's share is to be valued — by reference to the last set of accounts, by an independent valuer, or by a formula set out in the deed
• Payment terms: whether the buy-out price is paid in a lump sum or in instalments, and over what period
• Goodwill treatment: whether goodwill is to be included in the valuation, and if so, how it is to be valued

The first step for any surviving partner is to locate and carefully review the partnership deed. If the deed has not been reviewed recently, it may not reflect the current situation or the partners' current intentions. Seek legal advice from a solicitor specialising in partnership law on the interpretation of the relevant provisions.

The deceased partner's share: valuation and buy-out

The deceased partner's share in the partnership passes to their estate. In a partnership (unlike a limited company), there are no shares — instead, the partner had a capital account (reflecting their net investment in the business) and an income account (reflecting their share of profits and drawings). Together, these represent their economic interest in the partnership.

The valuation of this interest is typically the most contentious issue between the estate and surviving partners. The key components are:

• Capital account balance: the amount standing to the deceased's credit in the partnership accounts — this is money the partnership owes to the estate
• Share of goodwill: the value of the goodwill attributable to the deceased partner's share — often the most significant and disputed element
• Work in progress: the deceased's share of unbilled work in progress at the date of death
• Share of fixed assets: property, equipment, and other tangible assets of the partnership

An independent accountant or business valuer should be instructed to produce a formal valuation. Both the surviving partners and the executor should be represented, and if they cannot agree on a single joint expert, each side may instruct their own valuer.

Limited Liability Partnerships (LLPs): different rules apply

LLPs (formed under the Limited Liability Partnerships Act 2000) are governed by their LLP Agreement rather than the Partnership Act 1890. The LLP itself is a separate legal entity — like a company — and does not automatically dissolve when a member dies. This gives LLPs significantly more flexibility than general partnerships when dealing with the death of a member.

The LLP Agreement will typically govern what happens to the deceased member's membership interest on death. Common provisions include:

• The membership interest may not be automatically transferable to the estate — the deceased's estate may be entitled only to the financial value of the interest, not to any rights of membership or management
• The LLP Agreement may specify a buy-out process similar to a company's shareholders' agreement, with valuation and payment terms
• The LLP continues as a legal entity regardless — it is the membership interest that needs to be dealt with, not the LLP itself

Professional LLPs (law firms, accounting practices) often have detailed succession provisions in their LLP Agreements, including arrangements for the purchase of the deceased member's share through an insurance-funded buy-out. Review the LLP Agreement carefully and take legal advice.

Goodwill and tax: a significant consideration for professional practices

Goodwill is often the most valuable asset in a professional partnership — particularly for solicitors, accountants, surveyors, and other established professional practices. The treatment of goodwill on a partner's death has both legal and tax implications.

For IHT purposes, the deceased partner's share of goodwill is an asset of the estate and must be valued at the date of death. Whether Business Property Relief (BPR) is available to reduce the IHT charge depends on whether the partnership constitutes a "qualifying business" under the Inheritance Tax Act 1984. Most trading partnerships (but not investment partnerships) will qualify for 100% BPR, meaning the goodwill value may be exempt from IHT entirely.

For the surviving partners, paying goodwill to the estate is treated as a capital payment. If the buy-out is financed over time, the payments are typically treated as capital rather than income in the hands of the estate. The tax treatment of goodwill payments is complex and specialist tax advice should be sought, particularly for professional practices where goodwill values may be substantial.