Partnerships: advantages and disadvantages and roles and responsibilities of the partners

What is a Partnership?

A partnership can be created where two or more persons wish to establish a business relationship between themselves; without becoming a company. The legislation that deals primarily with partnerships is the Partnership Act 1890, s.1 of the Act defines a partnership as ‘the relation which subsists between persons carrying on a business in common with a view of profit’. Individual Partnership Agreements can also be created between partners and is considered a personal form of regulating the partnership.

Advantages of a Partnership

  • The main advantage to a partnership is the lack of formality that surrounds it. An agreement to create a partnership can be created orally, in writing, or may be implied by conduct; which requires no specific agreement between the parties to take place. A partnership may also cease at any time if no formality is in place; this allows each partner the freedom to leave the partnership any time and for any reason.

  • The documentation for the partnership can also be kept confidential and need not be disclosed to the public, unlike a company, which must make all company documents available for public inspection.

Disadvantages of a Partnership

  • A partnership can lose its advantage of informality if a Partnership Agreement is created, which, if breached, would lead to a claim for breach of contract by the other partners

  • Additionally, partners do not have a separate legal personality to the business and so will be personally liable for its debts and any losses incurred.

  • A Partnership that has no specified duration can be dissolved at any time; which can create insecurity and instability for the remaining partners. Dissolution can lead to the entire partnership ending, often to the disagreement of the remaining partners who are not in a position to purchase the out-going partner’s share of the business.

Roles and Responsibilities within a Partnership

Responsibilities to respective partners

The common law has imposed a duty of utmost fairness and good faith from one partner to another. The Partnership Act 1890 sets out specific principles in ss28-30: the partners must divulge to one another all relevant information connected with the business and their relationship. Partners must also share any profit or benefit received, without the consent of the partners, in connection with the partnership or from carrying on a competing business.

Decision-making

If no specific Partnership Agreement exists, the Partnership Act 1890 sets out that all partners share the responsibility for the business and for the decisions which affect the business. Each partner therefore has the right to equally contribute to matters that affect the day-to-day running of the business and decisions will be made on the basis of a simple majority, with each partner entitled to one vote. Decisions that change the nature of the business or are based on the introduction of a new partner, require unanimous consent.

Work input

All partners are also entitled to take part in the management of the business, albeit with no obligation to do so. There is no implication that a partner must devote his full time and attention to the business, however wilful neglect of the business can lead to that partner paying compensation to the remaining partners for the extra work they have undertaken.

Profits and Losses

The Partnership Act 1890 sets out that each partner is entitled to share the profits of the business equally, regardless of the amount contributed. The same applies to losses experienced by the business; each partner is jointly and severally liable and so can be individually sued by a debtor. However, the remaining partners have an obligation to indemnify the paying partner against bearing more than their share of any liability or expense connected with the business.

One method of avoiding the default provisions of the Partnership Act is for the partners to create a Partnership Agreement setting out the amount of salary, interest and/or profit-sharing each partner should be entitled to. It is common for such ratios to depend on the financial input initially made by each partner and the amount of time and work each partner contributes to the running of the business.

Authority of a Partner

Not all partners will have the authority to manage contracts on behalf of the partnership; however every partner will have the ability to bind the entire firm if they have actual or apparent authority. If a partner does act without authority and binds the firm, he will be personally liable to the other party in the contract. He must also indemnify his fellow partners for any liability or loss which they occur.

Termination of a Partnership

  • If no Partnership Agreement exists, or if there is no such provision within the Agreement, the partnership can be dissolved at any time by any partner giving notice to the others. This is called a partnership at will. The notice of dissolution can have immediate effect and need not be in writing unless the Agreement itself is by deed.

  • Under s.33 of the Partnership Act 1890, the death or bankruptcy of a partner automatically causes dissolution of the entire partnership.

  • There are no provisions in the Act relating to retirement or expulsion of a partner; therefore any such rights must be contained within an Agreement created between the partners.