In addition to the exposure of personal assets to repay debt incurred by the partnership, there is also a risk associated with assets of the partnership when a partner cannot satisfy his personal debts. If a partner runs into personal financial and debt issues, and doesn't have sufficient assets outside the partnership to repay their personal creditors, then their share of the partnership may be vulnerable. This is because they own their share of partnership assets personally.
This situation can be a significant challenge for the remaining partners and for the continued success of the business. The possibility of this occurring should be considered in the drafting of any partnership agreement, and when selecting the suitability of members of the partnership. Partnership Agreements can put the other partners in a position to restrict any distributions of profit to a bankrupt partner, in which case, exposure of partnership assets may not be a key concern.
Because the relationship between partners is one of great responsibility and trust, partners are considered to be 'fiduciaries' to each other. They are in a legal 'fiduciary' relationship.
What this means is that partners have certain duties and obligations regarding the way they act towards each other, insofar as the business is concerned. These duties impose a high standard of behaviour on each partner. These duties commence from the beginning of the relationship, even before the partnership is formalised.
Each partner is obliged to act in good faith, for the common benefit of the partners in all transactions relating to the business, and must also make sure they don't take advantage of their position as partner, particularly not through misrepresentation, threat or fraud. Partners must also ensure full disclosure at all times, for example, where a partner receives a benefit from their position in the partnership, that benefit must be shared.
A breach of fiduciary duty can have serious consequences. The main situations in which a breach occurs is where a partner receives a benefit or profits from a conflict of interest, a conflict of duty, or taking advantage of their position.
Where a person is found to have breached their duty towards other partners, a number of remedies may be sought against them. For example, you might be required to provide an 'account of profits' to the other partners. Any profits made in breach of trust must be transferred to the partnership. More significant than this, compensatory damages may also be available. Such damages are payable to compensate other partners for any loss, injury or other harm suffered as a result of your breach of fiduciary duty.
A partner who is in breach of such duties, or in breach of their obligations under the partnership agreement may find their involvement in the partnership terminated.
Being aware of these duties should set the ground work for a solid, trustworthy partnership foundation.