A significant aspect of being in a general partnership is the shareholder’s liability towards company creditors. As previously mentioned, you are also liable with your private assets if you operate a general partnership. These are not only savings, but all attachable funds including real estate or valuables. This applies up to the legally stipulated seizure limit.
In most states, the contingent liability is characterized as unlimited, personal, and joint liability. This means that, if necessary, each individual shareholder is liable for the entire debt towards third parties – this cannot be restricted or excluded by the articles of association. However, in this instance, the shareholder can demand compensation from the other shareholders.
It makes it all the more important to take out liability and/or commercial insurance. There are liability risks towards co-shareholders and a general risk in the respective industry.
In the articles of association, however, shareholders may limit their internal liability to the amount of the shareholders respective contribution, for example. However, this does not affect liability towards third parties. Even if a partner forms a contract and then becomes insolvent, the remaining partners will be liable to pay.
Example: In a fictional general partnership, the articles of association state that shareholder Mr. Smith bears 40 percent of all liabilities, and shareholder Mr. Jones holds 60. However, if Mr. Smith creates a contract with a supplier for $10,000 and then becomes insolvent, Mr. Jones must pay the total debt of $10,000. The supplier is not affected by internal business agreements, instead he is entitled to the entire amount owed to him by the general partnership.
New shareholders bear all the liabilities that the general partnership has accumulated to date.