Partnerships
Partnerships - Definition
Partnership is defined as 'the relation which subsists
between persons carrying on a business in common
with a view of profit'. A partnership is not a separate legal
person distinct from its members, it is merely a
'relation' between persons. Each partner (there must be at
least two) is personally liable for all the debts of the firm.
Partnership is a common form of business association. It is
flexible, because it can either be a formal or informal
arrangement, so can be used for large organisations or
a small husband-and-wife operation.
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The relation which subsists between
persons
• 'Person' includes a corporation such as a registered
company as well as an individual living person.
• There must be at least two partners. If, therefore, two
people are in partnership, one dies
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Carrying on a business
Business can include every trade, occupation or
profession. But three points should be noted.
(a) A business is a form of activity. If two or more
persons are merely the passive joint owners of
revenue-producing property, such as rented
houses, that fact does not make them partners.
(b) A business can consist of a single transaction.
These situations are often described as 'joint
ventures'.
(c) Carrying on a business must have a beginning and
an end. A partnership begins when the partners
agree to conduct their business activity together.
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In common
• Broadly this phrase means that the partners must be
associated in the business as joint proprietors. The
evidence that this is so is found in their taking a share of
the profits, especially net profit.
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A view of profit
• If persons enter into a partnership with a view of
making profits but they actually suffer losses, it is
still a partnership. The test to be applied is one of
intention. If the intention of trading together is just
to gain experience, for example, there is no
partnership.
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Liability of the partners
• Every partner is liable without limit for the debts of
the partnership. This means that a creditor can
require a partner to settle an invoice if the partnership
fails to pay, and partners must make good the
partnership’s debts if the partnership is terminated and
does not have sufficient assets to pay what it owes.
• It is possible to register a limited partnership in which
one or more individual partners has limited liability,
• but the limited partners may not take part in the
management of the business.
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Forming an unlimited liability
partnership
• A partnership can be a very informal arrangement.
This is reflected in the procedure to form a
partnership.
• A partnership is formed when two or more people
agree to run a business together. Partnerships can
be formed in any trade or occupation or profession.
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Limited partnership
• The limited partnership is useful where one partner
wishes to invest in the activities of the partnership
without being involved in its day-to-day operation. Such
partners are entitled to inspect the accounts of the
partnership.
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Terminating an unlimited liability
partnership
• Partnerships may be terminated by passing of time,
termination of the underlying venture, death or
bankruptcy of a partner, illegality, notice, agreement or
by order of the court.
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Events causing termination
• The Partnership Act 1890 states that partnership is
terminated in the following instances.
Passing of time, if the partnership was entered into for a
fixed term
Termination of the venture, if entered into for a single
venture
The death or bankruptcy of a partner (partnership
agreement may vary this)
Subsequent illegality
Notice given by a partner, if it is a partnership of
indefinite duration
Order of the court granted to a partner
Agreement between the partners
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Authority of partners in an unlimited
liability partnership
• Every partner is an agent of the firm and their other
partners for the purpose of the business of the
partnership, and the acts of every partner who does any
act for carrying on the usual way of business if the kind
carried on by the firm of which they are a member bind
the firm and their partners, unless the partner so acting
has in fact no authority to act for the firm in the
particular matter, and the person with whom they are
dealing either knows that they have no authority, or
does not know or believe them to be a partner.
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Liability of partners in an unlimited
liability partnership
• Partners are jointly liable for all partnership debts
that result from contracts made by other partners
which bind the firm. The Civil Liability Act 1978
provides that judgement against one partner does
not prevent subsequent actions against other partners.
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Definition of limited liability partnership
• Another form of partnership commonly used in England,
particularly for professional partnerships, is the limited
liability partnership (LLP). This type of business
association was created by the Limited Liability
Partnership Act 2000.
• LLPs are similar to limited companies in that they have
separate legal identity and unlimited liability for debts, but
the liability of the individual partners (or members) is
limited to the amount of their capital contribution.
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Formation
• A limited liability partnership may be formed by persons
associating to carry on lawful business with a view to
profit, but it must be incorporated to be recognised.
LLPs can have an unlimited number of partners. To
be incorporated, the subscribers must send an
incorporation document and a statement of
compliance to the Registrar of Companies
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Limited partnership
• The other form of partnership that is seen, rarely, in the
UK is the limited partnership. Under the Limited
Partnership Act 1907, a partnership may be formed in
which at least one partner (the general partner) must have
full, unlimited liability. The other partners have limited
liability for the debts of the partnership beyond the
extent of the capital they have contributed.
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