Partnerships Flashcards
what is a partnership?
a business structure that is formed where two or more people run and own a business together
created when the definition in s1 of the Partnership Act 1890 is satisfied
no formalities are required - the individuals didn’t need to intend to enter into a partnership and there is no requirement for a written agreement
definition of a partnership
definition in s 1 of the Partnership Act 1890, three elements:
1. between persons (individuals or companies)
2. carrying out a business in common (any activity of a commercial nature, not a charity)
3. with a view of profit
s 1 Partnership Act 1890: “carrying on a business in common”
business = “every trade, occupation or profession” (s45, PA 1890)
carried on = more than “mere agreement” for a partnership to be formed (Illot v Williams & Others [2013])
no requirement for the parties to have started trading (Khan v Miah [2000])
- partnership was held to exist where the parties had agreed to open a restaurant together
- partnership existed where parties had taken steps to pursue the venture (opening a joint bank account, obtaining a bank loan, and acquiring premises, furniture and equipment)
Effect of creation of a partnership
no separate legal personality, so:
- partners will be personally liable for the debts of the partnership, will need to pay debts out of their personal assets
- “partnership assets” are not owned by the partnership, they are owned jointly by the partners
Fundamental characteristics of a partnership
Partners will tend to have the following rights and responsibilities:
- To be involved in making decisions which affect the business (s24(5));
- To share in the profits of the business; s2(3) provides that this will be prima facie evidence that an individual is a partner (s24(1));
- To examine the accounts of the business;
- To insist on openness and honesty from fellow partners;
- To veto the introduction of a new partner; and (s24(7));
- To share any losses made by the business (s24(1));
- To indemnify, as a firm, fellow partners against bearing more than their share of liability connected with the business (s24(2)).
Decision making in partnerships
- Partners make decisions by a majority vote (s24(8))
- A decision to change the nature of the partnership business can only be done unanimously (s24(8)); and
- New partners can only be introduced with the consent of all existing partners (s24(7)).
Naming the Partnership
- restrictions set out in Chapter 1 of Part 41 of the Companies Act 2006
- Chapter 1 of Part 41 applies to any business (including partnerships) trading under a name which is not the entity’s real name. The provisions, therefore, apply to any partnership where its name does NOT consist solely of the name of the partners (e.g., Smith and Jones) (s1192).
- Where Chapter 1 of Part 41 applies, certain business names cannot be used without obtaining approval from the Secretary of State (e.g. names sounding like a government or local authority);
Duties of partners
Duty of the utmost fairness and good faith to each other so partners must comply with the requirements of s28 – s30 PA 1890:
- divulge information to other partners (s 28)
- account for benefits (s 29)
- account for profits from competing businesses (s 30)
Duty: divulge information to other partners
- s28 PA 1890
- Partners must divulge all information on “all things affecting the partnership” to the other partners
- e.g. partner selling premises to the partnership and suppressing the information about its premises
Duty: account for benefits
- s28 PA 1890
- Partners must account to the firm for any benefit derived, without the consent of the other partners, from a transaction concerning the partnership.
- need to consider: 1) has a partner derived a benefit 2) was this with the other partner’s consent
Duty: account for profits from competing business
- If a partner runs a business “of the same nature” and competes with the firm, the partner must account for any profits made by the competing business unless they have the consent of the other partners
- applies to businesses in direct competition with the partnership
- doesn’t include similar, but non-competing businesses e.g., if a partner sets up a business in a different part of the supply chain
arbitration
PA: implies nothing
CAN: to include an arbitration clause in the partnership agreement to resolve disputes between the partners without recourse to court action, to avoid the publicity, delay and expense of litigation.
commencement date
PA: implies nothing, partnership comes into being when s1 PA is satisfied
CAN: include a clause which specifies the start date of the partnership so that it is certain when the parties’ rights and obligations arise
Dissolution under s33 PA 1890
PA: death or bankruptcy of a partner will automatically dissolve the partnership (s33)
SHOULD: depart from this provision and provide that the remaining partners will automatically continue in partnership upon buying out the deceased/bankrupt partner’s share
drawings
PA: implies nothing
SHOULD: place a monthly limit on how much each partner can draw from the business to prevent any one partner from draining funds
duration and dissolution
PA: implies nothing,
- if there is no agreement to the contrary, the partnership will be a “partnership at will” (s26) > partnership will continue indefinitely, unless and until a partner gives notice to terminate the partnership
- Any partner may terminate the entire partnership “at any time by giving notice of his intention to do so to all the other partners” (s26)
- If given, a notice to terminate under the Act has immediate effect and does not need to be in writing unless the partnership agreement is made by deed (s26(2)) (flexible but unsecure)
SUGGESTED AMENDMENTS:
- Specifying a minimum period of notice.
- Requiring any notice to be given in writing.
- Agreeing a fixed term, whereby the partnership perhaps continues thereafter to be terminable with a minimum notice period.
- Providing that the partnership shall continue as long as there are two surviving partners
Expulsion of partners
PA: implies nothing, no possibility of a partner to be expelled by the other partners without the partner’s consent
SUGGESTED AMENDMENT: term enabling the partners to expel a partner in prescribed circumstances
Non-competition clauses
PA: implies nothing, partners can set up competition when leaving the partnership
SUGGESTED AMENDMENTS:
- limit the outgoing partner’s freedom to compete > term shouldn’t be unreasonably broad, otherwise will be void, clause must:
- protect legitimate interest
- be reasonable to protect that interest
Less burdensome non-compete clauses: non-dealing clause OR non-solicitation clause
Outgoing partner’s share
PA: If the partnership continues but there is a delay in payment of an outgoing partner’s share, that partner/their estate will be entitled to either: 5% interest on the partner’s share; or profits attributable to their share (s42)
SUGGESTED AMENDMENTS:
- Whether the partners have an obligation or an option to purchase an outgoing partner’s share;
- The basis on which the share will be valued;
- How to resolve disputes as to the valuation (e.g., professional valuation);
- The date on which payment will be due;
- An indemnity for the outgoing partner’s liabilities; and
- Valuation of goodwill.
retirement
PA: implies nothing, partners have no right to retire under the PA but partnerships can vary the agreement to remove a partner with unanimous consent (s19)
SUGGESTED AMENDMENT: clause allowing partner to retire without unanimous consent
Sale of capital assets and sharing of capital increases
PA: Partners share equally in the capital of the business (s24(1)), increases or decreases in the value of assets are therefore also shared equally
SUGGESTED AMENDMENTS: clauses reflecting different capital contributions of each partner to the business,
specifying what assets are “Partnership Assets” in which all partners will have a beneficial interest, and which are assets belonging to individual partners
Sharing of Profits / Losses
PA: Profits/losses of the business are to be shared by the partners equally (s24(1))
SUGGESTED AMENDMENTS: sharing profits to reflect each partner’s contribution to the business by:
- paying partners salary
- allowing interest in proportion to partners’ capital contributions (incentivises investment)
- providing that profits/losses are shared in specific percentages, as opposed to equally.
salary
s24(6) explicitly prohibits partners from receiving a salary unless an agreement to the contrary excludes this
Work Input
PA: Partners have a right, but not an obligation, to take part in the management of the business (s24(5))
- Under the PA 1890, it is possible to have a “sleeping partner”
SUGGESTED AMENDMENTS: fix each partner’s obligations and avoid a scenario where a partner can do nothing but nevertheless be entitled to an equal share in the profits of the partnership
- clause would need to cover sick leave and holiday entitlement
