Sample Business Law Paper on Liability in Partnership

Liability in Partnership

In a partnership, partners generally have unlimited personal liability to third parties in case obligations arise. Whether a person is liable to such obligations of the partnership depends on whether he is a legal partner or not. The paper uses the provided case study to determine the liability of various individuals connected to the Romulus partnership.

According to Gulshan (179), active or actual partners are those that become partners by agreement, contribute capital and actually participate in running the business. They are fully bound to the partnership’s obligations to third parties. Dormant or sleeping partners contribute capital, share profits but do not actively participate in running the business. As active partners, sleeping partners are also liable to third parties for the partnership’s debts if they are current members. Secret partners are dormant partners who disguise themselves as employees or otherwise to avoid unlimited liability. However, if they are disclosed, they become wholly liable for the business’s debts (Ashcroft & Ashcroft, 359). Nominal partners lend their names to be used in running the business but neither contribute capital nor participate in its management. Finally, a partner by estoppel or holding out according to Gulshan (179) is one that is only considered a partner when other partners rely on his promises to borrow finances. He becomes liable to the lender if other partners are unable to repay the debt.

In the provided case, Jack and Mari were the active partners as they contributed capital and managed the business thus they are fully liable to pay the debts. Lulu and Rob though disguised as landlord and employee respectively, were partners because they shared 10% of profit thus they are secret partners who are also fully liable to pay the debt. Ned made it clear in a written agreement that he did not wish to be a partner. Though he got 10% of profits, this can only be treated as a return to his investment. He can use the written agreement to defend himself against the liability in court thus; he is not liable to the debt. Mr. Moneybag is both a nominal partner and a partner by estoppel as other partners relied on his popular name and promise to obtain the debt. He too according to Gulshan (179) is liable to pay the full debt to Santa Rita Bank and Bank of Money.


By virtue of being partners in varying capacities, Jack, Mari, Lulu, Rob, and Mr. Moneybag are responsible to settle the outstanding debt in full. If the partnership’s assets cannot satisfy the debt, their personal assets can be sold to pay the debt. Ned however can escape liability due to the written agreement that excluded him as a partner.

Works Cited

Ashcroft, John, Ashcroft Janet, Cengage Advantage Books: Law for Business (16th ed.)      Mason, OH: Thompson Higher Learning. 2008. 359. Web. 31 March 2014.


Gulshan, S.S. Business Law. New Delhi. Excel Books. 2009. 179. Web. 31 March 2014.