Joint And Several Liability Of Partners (2026 Updated)

If you’re going into business with someone else, a partnership can feel like the simplest option: you split the workload, share the costs, and build something together.

But partnerships come with one big legal concept that catches many business owners off guard: joint and several liability.

This matters because it can mean you end up personally responsible for the whole of a partnership debt or obligation - even if it was caused by your business partner.

This 2026 update is a practical refresher on how joint and several liability works in New Zealand, why it’s still such a key risk area for partners, and the steps you can take to protect yourself from day one.

What Is Joint And Several Liability In A Partnership?

In plain terms, joint and several liability means that if your partnership owes someone money (or is legally responsible for something), then:

• All partners are liable together (that’s the “joint” part), and
• Each partner is liable individually for the full amount (that’s the “several” part).

So if your partnership owes a supplier $40,000 and the partnership can’t pay, the supplier can often choose to pursue:

• the partnership as a whole,
• both partners together, or
• just one partner for the entire $40,000.

This is one of the main reasons partnerships are considered a “high personal risk” structure, compared with a limited liability company.

Why This Can Feel Unfair (But It’s How Partnerships Work)

A common reaction is: “But that wasn’t my decision” or “I didn’t even know about that deal.”

Unfortunately, one of the defining features of a partnership is that each partner can bind the partnership when they’re acting in the ordinary course of the partnership business. That means your partner’s actions can create liabilities that land on your shoulders.

Even if you have an internal agreement between you about who should pay what, a third party (like a landlord or supplier) may still be able to enforce the full debt against any partner.

When Are Partners Personally Liable For Business Debts?

In New Zealand, a standard partnership isn’t a separate legal entity in the same way a company is. That’s the key starting point.

Because of that, partners can be personally liable for partnership obligations in several common scenarios, including:

• Trade credit and supplier invoices (e.g. stock ordered on account)
• Commercial leases and related rent/outgoings
• Business loans and finance agreements
• Tax obligations and statutory liabilities (depending on the circumstances)
• Claims arising from contracts the partnership entered into
• Negligence or wrongdoing connected to the partnership business

“But The Contract Was In The Business Name”

Many partnerships trade under a business name, which can make it feel like the “business” is the contracting party.

However, a trading name isn’t a separate legal person. If the partnership signs a contract, the people behind the partnership can still be on the hook. If you’re unsure how naming works legally, it’s worth reading about whether a trading name needs to be registered and what it does (and doesn’t) protect.

What If One Partner Makes A Bad Call?

Imagine this: you and your business partner run a small importing business. Your partner agrees to a large purchase order to “take advantage of a discount,” but demand drops and the business can’t sell the stock fast enough.

If the supplier isn’t paid, the supplier may chase you personally - even if you opposed the purchase or didn’t know it was happening.

This is exactly why “we trust each other” isn’t enough on its own. Trust is great, but legal foundations are what keep your business stable when things get stressful.

What’s The Difference Between A Partnership And A Company For Liability?

Choosing the right structure is one of the biggest “set it up right from the start” decisions you’ll make.

Here’s the practical difference:

Partnership

• Generally no limited liability
• Partners can be personally liable for business debts
• Often easier to set up, but riskier if anything goes wrong

Company (Limited Liability Company)

• The company is a separate legal entity
• Shareholders typically have limited liability (subject to exceptions like personal guarantees and certain director duties)
• Usually more credibility with investors and clearer rules for ownership changes

If you’re setting up a company with co-owners, the legal “rules of the relationship” are often documented in a Shareholders Agreement, and the company’s operating rules can sit in a Company Constitution.

A company isn’t automatically the best choice for everyone - but if you’re worried about personal risk, it’s a structure worth considering early.

Important Caveat: Limited Liability Doesn’t Mean “No Risk”

Even in a company structure, you might still be exposed if:

• you sign a personal guarantee (very common with leases and loans)
• you’re a director and breach duties under the Companies Act
• you trade recklessly or incur debts you can’t pay

So the real goal is to understand where your risk sits - and make sure it’s an intentional decision, not an accidental one.

Can A Partnership Agreement Remove Joint And Several Liability?

This is one of the most important questions we get from business partners.

A partnership agreement can’t usually remove joint and several liability as far as third parties are concerned.

In other words, your agreement might say “Partner A is responsible for supplier accounts and Partner B is responsible for rent,” but a creditor doesn’t have to follow your internal split if they’re legally entitled to recover the debt from either partner.

So What’s The Point Of A Partnership Agreement?

A well-drafted partnership agreement is still essential because it:

• sets clear rules about decision-making (e.g. what requires unanimous approval)
• defines roles and responsibilities
• sets out how profits and losses are shared
• creates processes for new partners joining or a partner leaving
• helps you resolve disputes without blowing up the business
• can help you recover money from the partner who caused the loss (even if you had to pay the third party first)

If you’re operating (or planning to operate) as a partnership, having a Partnership Agreement in place is one of the most practical ways to reduce risk and avoid misunderstandings.

How A Partnership Agreement Can Reduce Your Exposure In Practice

While it can’t always stop a third party from pursuing you, it can:

• limit authority internally (e.g. a partner can’t commit to contracts over $10,000 without written consent)
• require dual sign-off for loans, leases, or major purchases
• require proper records and regular financial reporting
• include indemnity clauses so the partner who caused the liability must reimburse the others
• set up a clear pathway for removal or exit if a partner is acting irresponsibly

These aren’t “nice-to-haves”. They’re often what saves a partnership when pressure hits.

Practical Ways To Manage Partnership Risk From Day One

Joint and several liability sounds scary - but don’t stress. There are practical steps you can take to lower your risk and run a safer partnership.

1. Be Clear About Your Business Structure (Before You Sign Anything)

Many partnerships form accidentally: two people start trading together, open a bank account, and split profits. That can be enough to create a partnership relationship, with all the liability that comes with it.

Before you sign a lease, take a loan, or lock in supplier terms, pause and confirm:

• Are you operating as a partnership?
• Should you be a company instead?
• Who is signing contracts, and in what capacity?

This is also where getting advice early can save you expensive clean-up later.

2. Use Written Contracts With Clear Signing Authority

Where possible, try to set up contract processes that reduce the risk of one partner binding the business without oversight.

For example:

• Set a rule that any contract over a certain value needs both partners to sign
• Keep a “contract register” so you both know what’s been agreed to
• Use written approvals (email can work, but consistency matters)

If you’re not sure what “proper signing” looks like, it’s worth tightening up your process around how to sign a contract, especially when your personal assets could be exposed.

3. Be Careful With Leases And Personal Guarantees

Commercial leases are one of the most common sources of “surprise” liability for partners.

Even if the lease is in the partnership name, landlords may still require:

• personal guarantees from partners
• a bond
• security (such as a general security agreement)

Lease terms can be long and hard to exit, so it’s smart to get the fine print checked before you commit. A Commercial Lease Review can help you understand what you’re actually signing up for.

4. Keep Your Finances Transparent (And Boring)

A lot of partnership disputes aren’t really “legal” problems - they’re financial clarity problems.

At a minimum, partners should agree on:

• who can spend money and up to what limit
• how often you reconcile accounts
• what reports you’ll share (e.g. monthly P&L, cashflow, outstanding creditors)
• what happens if one partner has to inject more funds

This is also where tax and cash handling matters. For example, if anyone suggests operating with cash “off the books”, it can create serious compliance and liability issues. (It’s never worth it.)

5. Have An Exit Plan Before You Need One

Partners usually don’t plan to fall out - but businesses evolve, life changes, and sometimes the relationship just stops working.

Make sure you’ve agreed upfront on:

• how a partner can exit
• how the business will be valued
• whether the other partner has a right to buy them out
• what happens to ongoing liabilities (including after a partner leaves)

If the partnership ends, documenting the terms properly matters. A Partnership Dissolution Agreement can help reduce confusion and future disputes about who owes what.

Key Takeaways

• Joint and several liability means each partner can be personally responsible for the full amount of a partnership debt, not just their “share”.
• Partners can become liable for common business obligations like supplier invoices, loans, and commercial leases - even if one partner caused the problem.
• A partnership agreement usually can’t stop a third party from pursuing any partner, but it can set internal rules, reduce risk, and help you recover losses between partners.
• If limiting personal exposure is a priority, consider whether a company structure (with the right documents in place) is more suitable for your business.
• Strong “day one” habits - clear signing authority, financial transparency, and a planned exit process - are often what keep a partnership healthy long-term.

If you’d like help setting up your partnership properly, reviewing your risk, or putting the right agreement in place, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.