What will hapen if some colleagues and I are considering forming a general partnership, however one person in the group has defaulted on a student loan?

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What will hapen if some colleagues and I are considering forming a general partnership, however one person in the group has defaulted on a student loan?

Would the partnership be considered liable for the bad debt, or could we construct a clause in the partnership agreement to exclude partnership liability for the matter of that debt? Clearly resolving the default is best, but as for the rest of us, what is the best way to proceed with the formation of the partnership?

Asked on July 25, 2012 under Business Law, Texas

Answers:

Bradley Miller / Miller Law LLC

Answered 8 years ago | Contributor

I think the first question that must be answered here is why you want to form a general partnership as opposed to an entity like an LLC or corporation that could provide you with liablity protection? With a partnership, a partner's interest in the partnership can be seized by a creditor to satisfy a personal debt. What that means is that if you don't have enough liquid assets (cash) in the partnership to pay off the partner's share, the debtor could (depending on your state's laws) force you to sell any partnership assets (e.g., buildings, equipment, vehicles) to come up with the money. As a comparison, in an Ohio LLC a creditor of a member is only be entitled to the distributions rights of the member and no membership rights or right of control - if the member is entitled to receive a distribution (like a corporate stock dividend) from the LLC, the creditor can get that money but nothing else.

While a limited partership might provide you with some protection if that member is only a limited partner, generally speaking you will probably need either an LLC or corporation if you want to protect the assets of the business from the student loan debt.


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