Summary Notes – Business Structures (Partnerships)
Concept of Partnership
• A partnership is a group of two of more people who directly own and operate a
business together.
• Key concept is “mutual liability”: Each partner in a partnership is both the principal
and agent of the other partners.
• Each partner has unlimited personal liability for the debts and obligations of the
business.
• The relationship between partners can be contractual (in a partnership agreement)
or regulated by legislation (Partnership Act 1891 (Qld)) (PA) and is governed by laws
of agency and fiduciary duties.
Partnership Agreement
The relationship between partners is a contractual one.
The terms of the contract are set out in the partnership agreement which may be:
1. A formal written document;
2. Partly in writing and partly oral; or
3. Wholly or partly implied
from the conduct of the
partners.
For exam question:
1. Does a partnership exist? (4 requirements)
2. If a partnership exists, is there authority to act?
3. Have any fiduciary duties been breached?
Partnership
• According to the definition in the Partnership Act:
“A partnership is the relation which subsists between persons carrying on a business
in common with a view of profit.”
• See: s5 (1) Partnership Act 1891 (Qld)
Requirements for a Partnership
• No formal registration requirements or legal formalities associated with the
establishment of a partnership.
• A partnership exists as long as the 4 requirements in the definition of ‘partnership’ in
the legislation are satisfied (regardless of the intention of the parties).
See: s5(1) Partnership Act.
1. Persons
2. Carrying on a business
3. In common
4. With a view to profit
Requirement 1 - Persons:
• At least 2 persons are required to form a partnership.
• General rule is that there can be no more than 20 partners: s115: Corporations Act
2001 (Cth).
• However, certain professional partnership is excluded.
- Example: law firms can have up to 400 partners.
- Example: accountants can have up to 1000 partners.
Requirement 2 – Carrying on a business:
• A ‘business’ is defined as including a “trade, occupation or profession.” See: s3 (PA).
• ‘Carrying on’ suggests there must be “some continuity or repetition of trading
activities”.
• A single transaction or one off project is usually not deemed to be a partnership. See:
Smith v Anderson (1880).
• However, if partners begin working together to prepare or establish an identifiable
business, the partnership commences from the date they begin working together.
See: Khan v Miah [2000].
• The key consideration falls on whether the parties entered into the commercial
venture with the necessary business intent.
Requirement 3 – In Common:
• The persons carrying on business together will only be partners in a partnership if
they are doing so ‘in common’.
• Each must act on behalf of the others as well as themselves.
• An employer/employee are carrying on a business together but are not partners –
while the employee is acting on behalf of the employer, the employer is not acting
on behalf of the employee.
See: Degiorgio v Dunn (2004).
• The requirement that partners act ‘in common’ does not mean that all partners must
take an active part in the business.
Example: one or more partners may be ‘silent’ partners (invest in the business, but
do not participate in the daily running of it).
Requirement 4 – With a view to Profit:
• The final requirement is that the persons are carrying on the business together to
make a profit.
• The requirement is that they are seeking to make a profit.
• If they expect to make a loss in the short term and/or they in fact do make a loss,
they will still be a partnership.
See: Minter v Minter (2000).
• If the persons are carrying on a business together for a non-profit purpose is it likely
they will have formed an unincorporated association rather than a partnership.
Authority of Partners
Mutual liability: each partner in a partnership is the agent of the firm; they are the agent of
the other partners.
• Each partner has express authority, implied authority and apparent authority to act
on behalf of the other partners when dealing with 3rd parties such as financiers,
suppliers and customers.
Actual authority
• Express authority – expressly authorised by other partners.
• Implied authority – partners have implied authority to act on behalf of the other
partners in doing all the usual things that would be necessary to carry out their
express authority and to carry on the business of the partnership.
• Examples include: selling the firm’s property; buying goods of the kind usually
employed in the firm’s business; hiring employees; borrowing money; incurring
debts and paying debts on the behalf of the partnership.
• Implied authority can be overridden by the partnership agreement or express
instructions to the contrary.
See: Construction v Hexyl (1985).
Apparent Authority
In addition to express and implied authority, a partner may have apparent authority to act
on behalf of the other partners.
Where a partner acts without actual authority, the other partners will still be liable if 4
requirements are satisfied:
1. The partner was carrying on business of the kind carried on by the firm;
2. That business was being carried on by the partner in the usual way;
3. The person with whom the partner was dealing knew or believed that they were a
partner;
4. The person with whom the partner was dealing did not know or suspect that the
partner had no actual authority – that person relied on the partner’s
representation’s in good faith and without notice of the partner’s lack of actual
authority. See: Crouch v IPG (2013).
Note: understand the difference between requirements 1 & 2.
1. The partner was carrying on business of the kind carried on by the firm. See: Mercantile
v Garrod (1962)
In deciding whether or not a partner was engaged in ‘business of the kind carried on by the
partnership’, the Court will consider:
a) what the usual business of the partnership actually is; and
b) what transactions a partnership of that kind would usually engage in.
2. However, even if the transaction falls within that definition, the other partners will only
be liable if the business was then carried on in the ‘usual way’ – otherwise the other
party, should suspect a lack of authority. See: Goldberg v Jenkins (1889)
Partners and Fiduciary Duties
• The relationship between partners is fiduciary and based on trust (to act in good
faith for the common good of the partnership).
• Partners will owe duties to each other at both Common Law and also pursuant to the
partnership legislation, including:
1. Not to profit personally from their position or from information gained as a result of
that position. See: Chan v Zaccharia (1984);
2. Not to put themselves in a position where there will be a conflict of interest, without
keeping their partners informed;
3. Not to compete with the partnership;
4. To fully disclose to the other partners all matters likely to affect the partnership. See:
Law v Law (1905); s31 PA (Qld)
5. To account for any private profits made without the consent of the other partners as
a consequence of the above.
6. To share profits. See: Birtchnell v Equity (1929); s32 PA (Qld)
