This series is looking at the common formats of trading as a business. Part 1 looked at the sole trader, this article will look into partnerships.
Partnerships
By its definition a partnership requires two or more people who:
- Share the right to take part in making decisions which affect the business or the business assets. Although they may have agreed that this right shall be limited in relation to one or more of their number,
- Share the ownership of the assets of the business. Although they may have agreed that the firm will use an asset which is owned by one of partners individually,
- Share the net profit of the business although, the contract need not provide for equal share.
- Share responsibility for the debts and obligations of the business without any limit. Although if one does not pay then the other must pay the missed share.
- There is no requirement to make any information public, for example accounts, partnership deed or any agreements.
- Partnerships are not required to hold annual meetings.
- A partner is an agent of the partnership and their other partners. Any act done by one partner on behalf of the partnership with the authority, express or implied, of the other partners bind the partnership.
- Each partner is liable jointly and severally with the other partners for all debts and obligations of the partnership incurred whilst they are a partner.
- Partners have certain obligations set out between themselves and in The Partnership Act 1890 which are implied into every partnership, unless varied by another agreement. For example, they must behave towards each other with the utmost good faith.
A partnership is governed in the first instance by The Partnership Act 1890. Section 1 defines a partnership as:
“the relation which subsists between persons carrying on a business in common with a view to profit”
Therefore, there must be at least two people involved in a partnership. This includes individuals with one another and companies either with individuals or other companies and there must be some agreement between the parties.
It is usual for partners to carry on the business under a ‘partnership’ name. The business must provide its customers, suppliers, and service providers with a notice containing the names and addresses of all partners. These must be easily read and in a prominent position.
It is useful to turn briefly to the main provisions of The Partnership Act 1890, as they provide some guidance as to how a partnership is to be operated.
Under the act:
- There is an assumption that the financial obligations of the partnership are to be undertaken equally and the benefits distributed on the same basis.
- The activities undertaken by each partner are undertaken on behalf of the partnership. As the partnership stands to gain there, is an implied indemnity. Therefore, in absence of agreement to the contrary the partnership must indemnity each partner in respect of payments made and personal liabilities incurred by each other in the ordinary and proper conduct of the business of the partnership.
- A partner’s obligation to contribute capital is limited to the amount which he agrees to make available. An individual partner may make a payment beyond the contribution required of him and in such case is undertaking an obligation they are not obliged to fulfil. The act states that, in the absence of an agreement to the contrary, a person is entitled to interest at the rate of 5% per annum on any "excess" contributions made.
- In the absence of agreement to the contrary, in relation to subscribed capital a partner is not entitled, before the ascertainment of profits, to interest on that capital.
- Every partner may take part in the management of the partnership. Although, agreement can be to the contrary this is a fundamental right and is viewed by the courts as such.
- Each partner is taken to be the agent of their co-partners for the purpose of partnership’s normal activities within the course of its business. Therefore, this is an implied duty of good faith.
- Each partner is accountable for private/secret profits derived from the principle that a partnership provides a legal relationship in which people unite to carry on business with a view to profit to be shared between them. Therefore, partners are accountable to the partnership for secret profits. A partner cannot make a profit at the expense of other partners without their knowledge and consent, regardless of whether the profit comes from the partnership's activities or from its business connections.
- Partners also can not undertake activities which compete with the partnership business without consent from all of the partners.
- Each partner has an implied authority to bind the co-partners in respect of contacts each has made on behalf of the partnership.
- Liability of partners for partnership and in the usual course of the partnership.
A partnership does not need to be in writing, but it is a good idea to have a Partnership Agreement. This way, you can be sure that your actual intentions are reflected in the agreement, and not just the provisions of the Partnership Act.
Our team at FDR Law can assist you to draw up a partnership agreement to govern the terms of your business relationship and help you to navigate the many factors to consider when establishing a partnership.
In addition to the usual model discussed above, there is also a business model for partnerships whereby liability is limited by using a Limited Liability Partnership. However, this is a model usually set up by professional bodies and organisation only.
If you would like more information on setting up a partnership, please contact our Head of Corporate, Margaret Evans at Margaret.evans@fdrlaw.co.uk or call Margaret on 01925 230000.
**This article does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is only intended to highlight issues that may be of interest. Specialist Legal Advice should always by sought in any particular case.**