General Partnership Flashcards
FORMATION
(1) two or more persons must
(2) carry on a business in common
(3) with the intention to make a proft.
Persons
The term ‘persons’ is not limited to natural persons but also
includes other business entities such as a company.
Business in Common
The term ‘business in common’ actually comprises two separate ideas: ‘business’ and ‘in common’.
1. For our purposes, ‘business’ is buying or selling goods or providing services for a fee.
For example, operating a clothing store is a business, as is operating a law frm.
2. The term ‘in common’ goes to the idea that the people conducting the business are operating it together—they each have a right to make decisions about the business, share in its gains, and the like
Intention to Proft
- it is the intention to make a proft that matters; the fact the business never actually makes a proft does not prevent it from being a partnership.
- It should also be noted that the parties need not have an intention to form a partnership;
- the only intention required is the intention to carry on togeth-er a business for proft.
No Formalities Required
1.Notice that there is no requirement of a written partnership agreement to create a partnership
2.nothing need be filed with Companies House.
Receipt of Share of Profts Prima Facie
Evidence of Partnership
- Sometimes it is unclear whether a partnership has been formed.
In these cases, courts will look to the circumstances to determine whether it appeared the parties intended to
carry on** a business in common**. - Under the Partnership Act, if a party receives a share of the profts of a business, that gen-erally is treated as prima facie evidence that a partnership exists.
- However, this presumption does not apply if:
*The receipt constitutes a repayment of debt;
*The receipt constitutes remuneration (payment) of an
employee or an agent (for example, the owner of a sandwich shop might agree to pay the shop’s manager 10%
of the profts—this in itself does not make the manager a partner); or
*The receipt constitutes an annuity to a survivor of a partner on account of a partner’s share of the profts or to a person who has sold the **goodwill **of the business.
Agreement Regarding Losses
Note that while an agreement to share losses might be some proof of an intention to form a partnership, it is not prima facie evidence. More importantly, a lack of such an agreement does not prevent the formation of a partnership.
Circumstances Not Creating a Partnership
- Under the Partnership Act, the mere fact that two or more people** jointly own property** does not in itself create a part-nership, even if they agree to share profts from the property.
- Similarly, the sharing of gross returns does not of itself create a partnership.
EXAMPLE
Review the example in which Arthur and Gwen agreed to purchase a used Lotus together. Assume they purchase it jointly, take turns driving it for a year, and decide to move on to a diferent car—a used Ferrari. Because of market condi-tions, the price of the Lotus has increased and they are able to sell it at a proft—each taking their share. They still are not partners, as they did not operate a business.
Contribution Not Required
Partners often contribute money or property to the partner-
ship, but a partner is not required to make any contribution
No Limit on Number of Partners
There is no legal limit on the number of partners that can be in a partnership.
NO SEPARATE LEGAL PERSONALITY
Again, unlike a company or an LLP, a partnership does not
have a separate legal personality from its owners. Therefore, the partners in a partnership have unlimited personal liability for the debts of the partnership.
AUTHORITY TO BIND THE FIRM
- The Partnership Act contains many provisions that deal with
the relationship between the partners and how the partner-
ship should be run. - However, most Partnership Act rules ap-ply** only if** the partners have not agreed otherwise
- (that is, it is open to the partners to override or supplement the terms of **the Partnership Act with a contractual partnership agreement, but they are not obliged to do so).
Authority of Partners to Bind the Firm
The rules governing this issue are set out in the Partnership Act and are based on the principles of Agency law, as the Partnership Act provides that **every partner in a partnership is an agent of the firm **and the other partners. Under Agency law, an agent can bind a prin-cipal (in this case, the frm) only if the agent acts with author-ity. The Partnership Act provides for two types of authority:
actual authority and apparent or ostensible authority.
Actual Authority
Under the Partnership Act, a frm will be bound by any act:
Done in a way showing an intention to bind the firm
1. By any person actually authorised by the frm to undertake the act.
2. Partnerships often have partnership agreements giving certain partners specifc powers and responsibilities. That would be a grant of actual authority.
3. Alternatively, the partners could vote to give a particular partner actual authority to do a specifc kind of act.
4. Courts also recognise** implied actual authority **if the partners have allowed a partner without express actual authority to regularly do an act.
Apparent or Ostensible Authority
The Partnership Act also provides that the act of a partner carrying on **in the usual way business **of the kind carried on by the firm will bind the firm and the other partners unless:
1. The partner had no authority to act, and
2. The person with whom the partner was dealing either:
(1) knew the partner had no authority to act, or
(2) did not know or believe the person they were dealing with was a partner.
- In determining whether an act is carrying on in the usual way business of the kind carried on by the form, the test is objective: would a reasonable third party think a business of this kind would usually do this act, and what authority would a reasonable third party expect a partner in such a frm to
have?
EXAMPLE
A and B formed a partnership to run a garage. They entered a partnership agreement expressly stating that the partnership will not buy and sell cars. Subsequently A agrees to buy a car from C. Because buying cars is business of the kind that a third party would usually expect to be carried on by a firm running a garage, the contract for the purchase of the car would be held to be within the apparent authority of A and, therefore, binding on the frm. (As we will discuss lat-er, B could, however, sue A for damages arising from breach of the partnership agreement.)
Case law has also shown that third parties can assume that part-
ners have authority to:
- **Buy and sell **firm goods;
- *Receive** debt **payments due to the firm;
- *Hire employees; and
- *Employ a solicitor to act for the firm.
Notice
Relatedly, if a third party gives notice (for example, a notice by a tenant to continue a lease) to a partner who
habitually acts in the partnership business, the notice will be considered to be notice to the firm (except, of course, in cases in which the third party and partner have joined to commit a fraud on the frm).
Exam Tip
It is very important to remember that as agents of the partnership, partners have apparent authority to bind the partnership to any contract within the scope of the partnership business. If a contract is outside the scope of partnership business, the partnership generally will not be bound unless the partner** has actual authority**.
Only Partner Bound If No Authority
- If a partner enters into a contract with a third party and does not have authority, that partner, and only that partner will** be personally liable** to the third party (technically, not on the contract but rather for breach of a warranty of authority, based on the principles of agency).
- This is because the part-ner, by purporting to enter into a contract with the third party on behalf of the partnership, warrants (that is,promises), that they have the authority to do so.
Liability for Debts and Wrongdoing
- Partners have unlimited personal liability for the debts of the partnership if the partnership itself is unable to pay its debts out of partnership property. This liability is joint, that is, a
creditor can choose to pursue one or all of the partners for their debt. - Partners are similarly liable for torts. Where any partner acting in the ordinary course of the business (or with the authority of the other partners) of the partnership com-mits a tort, the partnership is liable to the same extent as the partner, and the partners’ liability is joint and several.
Incoming Partners
- The Partnership Act provides that an incoming partner will not become liable to the creditors of the partnership for anything done before they become a partner. (Of course, the incoming partner and the current partners may come to a contractual agreement otherwise.)
- Note:** No** new partner may be added to a partnership without the consent of all existing partners.
- And note: Partners do not have the power to expel another
partner unless that power has been** expressly agreed to by
the partners **(for example, in the partnership agreement).
Outgoing Partners—Debts Incurred Before
Retirement
- If a partner leaves a firm and the frm continues, the outgoing/retiring partner remains liable for any debts or obligations incurred before the partner leaves
- The retiring partner and the continuing firm can agree that the partner will** not be liable** to the frm for these obligations (for example, by execut-ing a** release or a ‘hold harmless agreement’ under which the firm agrees to indemnify the retiring partner for liabilities), but such an agreement has no effect on the retiring partner’s direct liability to third parties unless the third party also agrees (a ‘novation’**).
EXAMPLE
A and B are partners in a garage. B decides to leave the firm, but the parties agree that C will become a new partner in B’s place. Shortly before B left the firm, they purchased an expensive, new diagnostic computer for the garage from Vendor and arranged to pay for it over time. B would remain liable for the payments to Vendor after leaving the firm unless A, B, C, and Vendor agree that C will take B’s place under the debt.
Outgoing Partners—Debts Incurred After
Retirement
- If a person deals with a firm after a change in its membership, they are entitled to treat all apparent partners of the old firm as still being partners of the firm until notice of the change has been received.
- Therefore, to discharge themselves from liability for future debts of the frm, a retiring partner needs to** give notice of their retirement.**
- **Actual **notice should be given
to existing creditors and notice by way of an advertisement in the London Gazette is required for new customers - If a partner retires and they were not known to a person dealing with the partnership to have been a partner, that retir-ing partner will not be liable for partnership debts contracted with that person after the date of their retirement.