MBE Rules · Business Associations
Partner Liability
Cal. Corp. Code §§ 16306-16307
The rule
Partners are jointly and severally liable for all partnership obligations, but creditors must generally exhaust partnership assets first; an incoming partner is not personally liable for pre-admission debts beyond her contribution.
In plain English
In a partnership, all partners share responsibility for the debts and obligations of the business, meaning creditors can pursue any partner for the full amount owed. However, creditors must first try to collect from the partnership's assets before going after individual partners. If a new partner joins, they are only liable for debts incurred after their admission, limited to their investment in the partnership.
Worked example
Alice and Bob are partners in a bakery and owe $100,000 to a supplier. When the bakery goes bankrupt, the supplier can first seek payment from the bakery's assets. If those assets are insufficient, the supplier can pursue either Alice or Bob for the full amount. If Carol joins the partnership after the debt was incurred, she is not liable for the $100,000 beyond her contribution to the partnership.
Memory hook
Partners share the load, but creditors must first check the partnership's assets!
The trap
Exams often present scenarios where students must determine the liability of new partners for pre-existing debts, which can confuse them if they overlook the limitation of liability to the new partner's contribution.
How examiners test it
Questions frequently involve fact patterns with multiple partners and debts, testing candidates on their understanding of joint and several liability as well as the implications for incoming partners.
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