A partner’s departure, death or enforcement: how to preserve a general partnership and a limited partnership

A general partnership rests on the partners carrying on business together and being liable with all their assets. From this the Act concludes that when one of the partners drops out, the partnership is as a rule dissolved. Unlike an s.r.o., where an ownership interest is inherited or transferred and the company continues, in a general partnership continuation is the exception, and it has to be secured by the agreement or by a timely decision of the remaining partners.

When the partnership is dissolved

In addition to the general grounds for dissolution, the Act lists specific grounds for a general partnership (Section 88(1)). These include notice given by a partner where the agreement was concluded for an indefinite period, given at the latest six months before the end of the calendar year unless the agreement provides otherwise; the death of a partner; the dissolution of a legal entity that is a partner; a declaration of bankruptcy over a partner’s assets or the dismissal of a bankruptcy petition for insufficiency of assets; deprivation or restriction of legal capacity; and service of an enforcement order affecting a partner’s interest. The partners may stipulate further grounds in the agreement.

What matters in the case of events on the side of a single partner is therefore what happens next. For most of them the Act offers the remaining partners a means of saving the partnership:

Where the grounds for dissolution of the partnership set out in paragraph 1(a), (c), (d), (e), (f) and (g) arise, the remaining partners may agree, by amending the partnership agreement, that the partnership continues in existence without the partner to whom the ground for cessation relates. Such an agreement to amend the partnership agreement must be made within three months of the dissolution of the partnership; otherwise this right lapses.

— Section 88(2) of Act No. 513/1991 Coll. (unofficial English translation)

Three months is a short time, particularly where a partner has died and the others are dealing with family and business matters alongside the partnership. If only one partner remains, there is no one with whom to make the agreement; for that case the Act offers assumption of the net assets without liquidation within one month, which we examine in our answer on what happens when only one partner remains.

The death of a partner and the heirs

The death of a partner does not dissolve the partnership where the partnership agreement allows an heir to become a partner, the heir claims their participation and at least two other partners remain in the partnership (Section 88(1)(c)). The procedure for making the claim is precise:

If the death of a partner does not cause the partnership to cease to exist, the heir may claim their participation in the partnership within one month of the conclusion of the succession proceedings. By making that claim, the heir succeeds to the rights and obligations of the deceased partner as at the date of their death. The claim must be made in writing and the heir’s signature must be officially certified.

— Section 91(1) of Act No. 513/1991 Coll. (unofficial English translation)

An heir who does not make such a claim is entitled to a settlement share (Section 91(2)). Where there are several heirs, each decides for themselves in respect of their own part, and the deceased partner’s interest is divided among them in proportion to their shares in the estate (Section 91(3)). Anyone who wants the family to be able to continue in the business must write that possibility expressly into the partnership agreement; without it, the death of a partner leaves only the three-month agreement of the others under Section 88(2), or assumption of the net assets by the single remaining partner under Section 88a.

Bankruptcy and enforcement against a partner

Bankruptcy over a partner’s assets or an enforcement order against their interest threatens the partnership without any failing on the part of the other partners. If the partnership is saved by an agreement under Section 88(2), the partner concerned becomes entitled to a settlement share (Section 89). The Act also contemplates a return: if the bankruptcy is annulled on grounds other than performance of the distribution schedule or insufficiency of assets, the partner’s participation is restored and the partnership is entitled to the return of the settlement share paid out; the same applies mutatis mutandis where the enforcement proceedings are discontinued (Section 88(3)). If the partnership has not yet ceased to exist, the partners may on these terms agree that it continues in existence (Section 88(4)).

Withdrawal and disagreements among partners

A partner may withdraw voluntarily by amendment of the partnership agreement, provided at least two partners remain (Section 83). The rules on general partnerships in the Commercial Code contain no special procedure by which the other partners could expel a partner. Where the partnership agreement is materially breached, the court may, on the application of another partner, dissolve the whole partnership (Section 90). The agreement may also add grounds for dissolution of its own (Section 88(1)(h)), but the agreement to continue the partnership under Section 88(2) does not extend to those, so this is not a tool for the departure of a single partner. That is better served by contractual rules on the withdrawal and settlement of a departing partner. Departure does not, however, end liability for obligations that arose earlier, as explained in our answer on a partner’s liability after withdrawal.

The settlement share

Where the partnership continues without a partner under Section 88(2), or where its net assets are assumed by the single remaining partner, the former partner or their heir receives a settlement share, calculated in the same manner as a share in the liquidation balance (Section 89); the rules on an heir who does not claim participation also refer to that provision (Section 91(2)). Under the Act, the liquidation balance is divided first up to the value of the contributions paid up and the remainder in equal parts, unless the partnership agreement provides otherwise (Section 92). In a partnership with valuable assets and small contributions, the statutory calculation may therefore produce a result other than what the partners would consider fair. It is sensible to agree the method of valuation and the due date of the settlement share in advance.

The limited partnership

The rules on general partnerships apply mutatis mutandis to a limited partnership (Section 93(2)). For limited partners, however, the Act makes an exception: their death, restriction of legal capacity, bankruptcy or the dissolution of a legal entity that is a limited partner are not grounds for dissolving the partnership; in bankruptcy only their participation ceases (Section 102). For general partners the same risks apply as for the partners of a general partnership. If the participation of all limited partners ceases, the general partners may agree that the partnership is converted, without liquidation, into a general partnership (Section 103). A structure in which the general partner is an s.r.o. is particularly sensitive; its risks are examined in the article on a limited partnership with an s.r.o. as general partner.

What to agree in the partnership agreement

The partnership agreement of a partnership should address the admission of heirs, the procedure to be followed by the other partners on the bankruptcy of, or enforcement against, one of them, the grounds and rules for withdrawal, the calculation and due date of the settlement share, and any grounds for dissolution of its own. We prepare such an agreement as part of our general partnership formation and limited partnership formation services. Whether a partnership is suitable for your plans at all is examined in the article on when a partnership makes sense instead of an s.r.o..