Another major consideration for partners is what happens if one partner ends up bankrupt. In the absence of a partnership agreement setting out what happens in a bankruptcy situation, the default position of the Partnership Act is that the partnership will be dissolved ‘by the bankruptcy or death of a partner’.
This may not be what the partners want, particularly if there are existing obligations.
Whilst all partners are not liable if one partner becomes bankrupt, the creditors may be entitled to the bankrupt partner’s shares in the business. The creditor could opt to become a silent partner in the business, sharing profits and losses, or they can enforce a sale of the assets so that the bankrupt partner’s share can be cashed out.