Partnership Law – The Essentials

Friday, June 25th, 2021

In the world of commerce, it is difficult to imagine living without Google thanks to its founding partners Sergey Brin and Larry Page, Apple without the Steves Wozniack and Jobs or more specifically to the United Kingdom, good ol’ Marks & Spencer, created by the partnership between Michael Marks & Thomas Spencer in 1884.

Whilst the limited company is nowadays the preferred method of running a business where more than a single individual is involved, the partnership model has far from had its day.

According to figures from the House of Commons Business Statistics, as of 2020, there were approximately 414,000 business partnerships, a testament to this model’s longevity and appeal.

Want to know the essentials about partnership law in matter of minutes, rather than dust off an impenetrable legal textbook?

Read on.

Definition

In the context of business, a partnership is pithily described as a collection of individuals defined by s.1 of the Partnership Act 1890 (“PA 1890”) as “carry[ing] on a business in common with a view to profit.”

The Agreement

As with any business arrangement, we at Hanne & Co will always recommend drawing up an agreement that records the terms upon which the partnership will operate. Where such a written agreement does not exist, the PA 1890 steps in to provide the default position with respect to the rights and obligations of the partners, as well as the functioning of the partnership.

Liability

There has been a distinction between traditional partnerships, limited partnerships (where there is usually one “general” partner and one “limited” partner) and the more commonly used limited liability partnerships since the Limited Liability Partnerships Act 2000 was passed. In the case of traditional partnerships, partners are jointly and severally liable for all the debts and liabilities of the business without limitation, meaning that each partner could be sued individually or jointly with the other partners. In the case of limited liability partnerships, the business (like a company) has a separate legal personality and therefore its partners (as agents) tend not to be personally liable for its debts and obligations.

Profits & Losses

In the absence of a written partnership agreement, all profits and losses of the partnership will be shared equally between the partners by virtue of the PA 1890.

Assets

If a written agreement does not exist, it may cause a dispute as to what does and does not constitute partnership assets. On dissolution, the default position is that all the partnership assets will need to be sold. The partners will be entitled to the residue (if any) after losses, debts, advances and expenses of the dissolution are settled.

Decision making

Unless there is written agreement to the contrary, all the partners have the right to participate in the decision making and management of the business and the consent of all is required to make changes to the nature of the partnership, either by express agreement or established course of dealing. The default provisions cause problems in that where there is a deadlock, the only thing that can be done is to dissolve the partnership altogether. This emphasises the importance of having a written agreement in place rather than leaving it to the PA 1890 to regulate matters.

Employment matters

A partner cannot also be employed by the partnership, so will be self-employed and pay income tax on that basis. The PA 1890 does not include restrictive covenants to prevent outgoing partners from setting up direct competition, so this will need to be included in a written agreement.

New Partner/Removal of a Partner

The basic position is that all partners must give their consent for a new partner to join the unless the partnership agreement says otherwise.

There is no default provision allowing for the removal/expulsion of a partner (in the same way that the Companies Act 2006 does for limited companies and the removal of a director). Therefore, any such provision will need to be added into a written agreement.

Death/Retirement of a Partner

The PA 1890 does not contain any provisions to allow for a partner to exit the partnership via retirement whilst keeping it intact, meaning that the default rule is that the partnership must be determined in the event of a partner’s retirement or death.

Dissolution

Once the business has been dissolved and outstanding debts/obligations settled, any residue will be paid to the partners.  In the absence of there being a written agreement, the residue will be split in accordance with the partners’ profit-sharing ratios.

If you require further advice about partnership law or have a specific query about your partnership matter, please do get in touch for a confidential, initial discussion.

Partnership - Hanne & Co's Abeer Sharma looks provides a basic overview of the law governing business partnerships and what to consider when operating as a partnership

Abeer Sharma is a Solicitor in Hanne & Co’s Property Litigation & Dispute Resolution Team. He specialises in advising both businesses and individuals in relation to commercial litigation matters including breach of contract, consumer disputes, debt recovery, director/shareholder issues, partnership disputes, professional negligence claims and property disputes.