Will I inherit my partner's debt when I go into business with him?
By Elaine Pofeldt | Published: April 8, 2013
Your Business Credit
Dear Your Business Credit,
I am planning to become a partner in a business with someone who has been running it for several years. He has built up some credit card debt to pay for business expenses. Will I become responsible for his debt once I become an owner? -- Worried
Great question. If more business owners looked into issues like this before going into business together, there would fewer frayed partnerships.
I assume that you are asking about this because your partner took out a small-business credit card in the name of the company. Many people don't know that these cards are usually treated like personal cards by issuers. The individual signing for the card is ultimately the one who is responsible for the charges, even if it has the business's name on it.
If you don't become a signer on your partner's credit card account, you generally will not be held responsible for the charges in a case like this, says Nina Kaufman, an attorney who works with many small-business clients. "But if there is any concern," she adds, "it would be worth speaking to the credit card company to confirm the policy."
When you call the issuer, ask what kind of liability someone must assume to get the kind of card your partner has. On some small-business cards, the cardholder takes on "joint and several liability," meaning the cardholder and the business share responsibility for the debt.
Under such an agreement, the card issuer has the right to pursue both the cardholder's personal assets and those of the business if the account is delinquent, says Stephen Furnari, an attorney based in New York City who works with many small-business clients. That could mean going after your partner's assets -- or those of the business, including any that you own together. (Your home, however, would not be at risk, since that's a personal asset that belongs to you).
Likewise, if your partner defaults on a card with joint and several liability, both his personal credit score and the company's business credit score will suffer. Your personal score should be insulated, though, as long as your name is not on the account.
Before you negotiate your partnership agreement, it's a good idea to talk with a seasoned attorney about the terms. It's possible to draft it in a way that gives you protection from your partner's debts.
"A new partner would have the right to say, 'I will not be responsible for X, Y and Z debts or obligations of the company,'" says Furnari. You could spell out that your partner must pay for certain expenses out of his share of the company's sales or profits.
You could also gain protection by negotiating a clause under which your partner agrees to indemnify you if a creditor pursues your partner for debts. "It would be a provision within a partnership agreement," says Kaufman. This could come in handy if, for instance, your partner stiffed someone a year ago, and that person comes after you now.
Once you enter the partnership, open your own small-business credit card, rather than joining your partner's existing cardholder agreement, advises Furnari. "If you join the credit card account, you have liability to the extent that you are the guarantor," he says.
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