What is a Partnership?
A partnership may be created where two or more individuals establish a formal business relationship between themselves. A partnership is different to a company.
Under section 1 of the Partnership Act 1890, a partnership is defined as “the relation which subsists between persons carrying on a business in common with a view of profit”. Individual Partnership Agreements are typically created between the partners with the purpose of regulating the partnership.
Advantages of a Partnership
The main advantage of a partnership is the relative lack of formality that may surround it. Whilst an agreement to create a partnership can be created orally, in writing, or implied by conduct – the terms should ideally be formally incorporated into a Partnership Agreement.
A further advantage is that the partnership documentation can be kept confidential and need not be disclosed to the public. Compare this to a company, which must make all company documents available (and an increasing amount of other information) available for public inspection.
Disadvantages of a Partnership
A partnership will lose its advantage of informality if a Partnership Agreement is created. This means if one of the partners wants to follow a different path in breach of the Partnership Agreement, that partner could face a claim for breach of contract.
Partners do not have a separate legal personality to the business. This means they will be personally liable for its debts and any losses incurred – and they bear the burden of unlimited liability.
A partnership that has no specified duration can be dissolved at any time, potentially creating insecurity and instability for the remaining partners. Dissolution can lead to the entire partnership ending. This can lead to disagreement between the remaining partners who may not be in a financial position to buy out the out-going partner’s share of the business.
Roles and Responsibilities of the Partners
Responsibilities to respective partners
The common law imposes a duty of utmost fairness and good faith on one partner to the others. In addition, the Partnership Act 1890 sets out specific principles in sections 28-30:
- the partners must divulge to one another true accounts and all relevant information connected with the business and their relationship
- to share any profit or benefit received, without the consent of the partners, in connection with the partnership or from carrying on a competing business
- the duty not to compete with the partnership without the others’ consent
The provisions of the Partnership Act apply by default if there is no formal partnership agreement in place.
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. Decisions are to 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.
All partners are entitled to take part in the management of the business, however, there is 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 the relevant partner paying compensation to the other partners for the extra work they have undertaken.
Profits and Losses
The Partnership Act 1890 states that each partner is entitled to share the profits of the business equally, regardless of the amount contributed.
Each partner is jointly and severally liable for losses suffered by the business and can each be sued by a debtor. However, any partner against whom no action is taken has an obligation to indemnify the paying partner/s against bearing more than their share of any liability or expense connected with the business.
The default provisions of the Partnership Act can be varied by creation of a Partnership Agreement setting out the amount of salary, interest and/or profit-sharing each partner is entitled to. It is common for the relevant shares to reflect the initial financial input 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 acts without authority and binds the firm, he will be personally liable to the other party in the contract – and must indemnify the other partners for any liability or loss which they occur.
Termination of a Partnership
If no Partnership Agreement exists, or if there is no provision within the Agreement, the partnership can be dissolved at any time by any partner giving notice of dissolution 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.
In the absence of a Partnership Agreement (or if the Agreement does not cover termination),illegality, death or bankruptcy of a partner automatically dissolves 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.