Where the rubber meets the road

You run a business in the Netherlands together with your business partner. Business is going well, you trust each other and each of you has your own responsibilities. Until it turns out that your partner has entered into a substantial financial commitment without consulting you. The business cannot pay and the creditor comes knocking. Not only at the door of the partnership – a Dutch general partnership (vennootschap onder firma, or vof) – but also at yours personally.

You did not sign the agreement, knew nothing about the commitment and strongly disagree with it. Yet you may be liable for the entire debt. Even your savings, your home and your other personal assets may be put at risk as a result.

How do you prevent your partner’s business decisions from determining your personal financial future?

The legal point

Under Dutch law, each partner in a vof is, in principle, jointly and severally liable for the debts of the business. This means that a creditor can claim the full debt from any one partner, regardless of who entered into the obligation or how the partners have divided responsibilities between themselves.

Three points are of particular importance:

• Your partner can bind you financially. Each partner is, in principle, authorised to enter into agreements on behalf of the vof – even without your consent. You can limit that authority, for example by stipulating that both partners must sign for obligations above a certain amount. For such a limitation to be invoked against third parties as well, correct registration in the Dutch Trade Register (Handelsregister) of the Netherlands Chamber of Commerce (KvK) is crucial.
• Internal arrangements do not automatically protect you against creditors. Have you agreed that your partner will bear certain debts themselves? Then, in certain circumstances, you may be able to hold them to that agreement if you have to pay. The creditor, however, is not bound by that internal arrangement. And if there is nothing to recover from your partner, you may still be left with the financial consequences.
• You may remain liable even after you leave. Leaving a vof does not automatically release you from existing obligations. Your liability may continue for debts incurred while you were a partner. Moreover, a departure that is not registered, or not registered correctly, may lead to additional risks.

The most common misconception is that a well-drafted partnership agreement fully protects your personal assets. It does not. However, carefully documented powers, financial arrangements and control mechanisms can significantly reduce the risks.

What does this mean for VOF partners?

A vof is built on cooperation and trust. But it is precisely when trust is high that legal arrangements are often insufficiently documented. As long as all is going well, that does not seem to be a problem. Only when a partner enters into irresponsible commitments, withholds financial information or the partnership comes to an end does it become clear how vulnerable that situation can be.

A well-drafted partnership agreement therefore covers far more than the division of profits. Think of clear limits on each partner’s powers, arrangements on major financial decisions, access to the accounts and the consequences if one of the partners fails to meet their obligations.

The end of the partnership also deserves attention. What happens if a partner wishes to leave, falls ill for a prolonged period or dies? How is the business valued, who may continue it and who bears the existing obligations?

Moreover, as a business grows and takes on greater financial risks, it becomes important to ask whether the vof is still the most suitable legal form. Moving to a Dutch private limited company (besloten vennootschap, or bv) may be advisable in certain circumstances, but requires a careful assessment of the existing obligations and liabilities.

Questions for VOF partners

Ask yourself the following questions:

• Do you know which financial commitments your partner may enter into without your consent?
• Have any limitations on the power of representation been correctly documented and registered in the Dutch Trade Register?
• Do you know what consequences it may have for your personal assets if your partner incurs a large business debt?
• Is it clearly set out what happens if the partnership ends or one of the partners can no longer pay?
• Does your current partnership agreement still match the size and financial risks of your business?

If you cannot answer all these questions with confidence, it is advisable to have your legal position assessed before problems arise.

Final thoughts

Running a business with a partner means seizing opportunities together, but also sharing financial risks. The danger often lies not in the arrangements you make consciously, but in the commitments your partner can enter into without your knowledge.

Sound legal arrangements cannot rule out every risk, but they can prevent you from being unnecessarily vulnerable. And it is precisely while the partnership is still going well that these arrangements are best made.

Contact

Would you like to know what risks you personally run as a partner and whether your current partnership agreement offers sufficient protection? We would be pleased to assess your legal position and advise you on the measures that best protect your business interests and personal assets.

Please feel free to contact us on +31 20 800 64 00 or at info@acginter.com.