Partnerships Flashcards
Definition of partnership
A partnership is a contract between persons, and subject to some exceptions not exceeding 20 in number, which creates an association of persons, in terms of which the parties agree to contribute labour, skill, money, rights or property to a common stock and carry on business with the intention to make profit for the joint benefit of the parties.
DISCUSS THE NATURE OF A PARTNERSHIP
• Consensus (which can be divided into, real consensus and apparent consensus). The parties must intend to create a partnership.
• Contractual capacity;
• Lawfulness: As soon as the membership of a partnership exceeds 20 in number (with certain exceptions) it becomes illegal, terminates automatically and may not carry on business as a partnership anymore, but needs to register as a Company.
• Formalities: No formalities are required by law. A Partnership need not to register with any state agency.;
• Performance.
A partnership is an association of persons. A partnership does not exist apart from its members. Although a partnership is not a legal entity or legal person separate from its members it is sometimes treated as if it exists separately from its members:
• A partnership can be sued and can sue (litigate: bring an application or action in a court of law) in its own name (A partnership name ends with ___ & Partners”);
• A partner can stand surety for the partnership;
• The partnership estate is sequestrated separately from (but also simultaneously with) the estates of the individual partners.
DISCUSS THE ESSENTIALIA OF A PARTNERSHIP AGREEMENT
The essentialia of a partnership are:
• Contribution to common stock: The contributions of the partners, as well as additional assets and goodwill acquired by the partnership during its duration, fall in a common fund and are called the common stock or partnership property and ownership thereof vests in the members of the partnership jointly and in undivided shares. The contribution can be labour, skill, money, rights or property. A partner who contributes labour is entitled to remuneration when the business is making a profit but is not a creditor of the partnership, for arrear remuneration, when the partnership is sequestrated. A partner who contributes money must pay that money into the partnership’s bank account and is not a creditor of the partnership for the initial contribution. Subsequent to the formation of the partnership a partner may loan money to the partnership and become a creditor of the partnership. A partner who contributes rights must cede (transfer) the rights to the partnership. A partner who contributes property must deliver moveable property to the partnership and register fixed property in the partnership’s name.
• Profit motive: The main objective of the parties must be to make profit. Profit may be generated by a single objective (e.g. the acquisitions and sale of property for profit) or continues venture such as an ongoing business. An association formed for a non-profit motive can never be a partnership (e.g. a club or cultural association).
• Joint benefit: Each partner must have the right to share in the net profits of the partnership business. Partners share the profits as agreed, and in the absence of an agreement to that effect, in the same proportions as the value of their contributions and if it is not possible to establish the value of their contributions, they share equally in the net profits. Each partner may have the obligation to share in the losses of the partnership business. Some partners may however, if so agreed, share only in the profits and not the losses of the business. An agreement that one partner share in the profits only and another partner in the losses only is not a partnership.
DISTINGUISH BETWEEN DIFFERENT TYPES OF PARTNERSHIPS
- Ordinary partnerships: All partners share in profits and losses
- Extraordinary partnerships. The extraordinary -, “sleeping” or limited partner’s enjoy limited liability for partnership debts and may not have their names disclosed in the firm’s name. Extraordinary partnerships include:
- An anonymous partnership: The extraordinary or “sleeping partner” is not liable to third parties for partnership debts on the condition that he/she does not publicly hold him-/herself out as a partner and does not allow other partners to publicly hold him/her out as a partner. The ordinary partner is liable to third parties for partnership debts. The extraordinary or “sleeping partner” is however liable to his partners to the full extent of his proportionate share of the debts but on termination of the partnership the extraordinary partner is not in solidum liable for the debts of the partnership.
- A partnership en commandite: The extraordinary or “sleeping partner” share in profits but his/her liability for partnership losses is limited to his/her contribution to the common stock, on the condition that he/she does not publicly hold him-/herself out as a partner and does not allow other partners to publicly hold him/her out as a partner. The ordinary partner share in profits and losses.
- A “limited Partnership” in terms of old Provincial Legislation in the Cape Province and Natal: The extraordinary or “limited partner” share in profits but his/her liability for partnership losses is limited to his/her contribution to the common stock, on the condition that he/she does not publicly hold him-/herself out as a partner and does not allow other partners to publicly hold him/her out as a partner. The ordinary partner share in profits and losses.
THE RIGHTS AND DUTIES OF PARTNERS
RIGHTS and DUTIES
Use of partnership assets
Every partner can use the assets of the partnership to promote the business of the partnership
Contribution to the common stock
Every partner must make a contribution to the partnership assets as agreed
Profit sharing, compensation for services rendered and interest on capital.
Every partner has the right to share in the net profits available for division at the end of an accounting period
If agreed, a partner can claim interest on his capital contribution together with his share of the profits
Partners are entitled to indemnity for damages suffered, or expenses incurred, in the execution of duties
A partner will be entitled to remuneration if agreed upon
Share in losses
• Losses are shared by partners as agreed, or in the absence of an agreement in the same percentage as the share in profits.
Carry on the business and control its management
Each partner has right to participate in management of partnership
A partner can bind co-partners with his acts performed as manager: This right may be limited or excluded (naturalia).
• The relationship between the partners are governed by the law of agency.
• Partners have the right to manage the partnership business.
To exercise care
Every partner must exercise care and skill in the running of the business
Any partner who acted negligently will be held responsible for losses
Carry on the business honestly and fairly
• The duties of principle and agents apply to the partners.
Good faith
• Partners may not make secret profits (i.e. profit personally and exclusive of the other partners from transactions falling within the scope of the partnership business.)
• It follows that a partner may not compete with the business of the partnership.
• A contract between a partner and a third party, which is in breach of the trust between the partners, is unenforceable
Accountability to other partners
• Following from the duty of good faith, a partner must disclose any secret profits and any business opportunities he/she is aware of, from which the partnership may benefit.
Access to partnership books and records
Every partner has the right to inspect the partnership’s books and other documents
This right may be limited or excluded in the contract
THE TERMINATION OF PARTNERSHIPS
A partnership may terminate by:
• Agreement: Express or tacit agreement
• Effluxion (expiration) of time, notice and conclusion of business: If partnership agreement was only concluded for specific period or project, will dissolve after time expires or project is finished
• Change in membership: Death of a partner, Retirement of partner, Admission of new partner. The reason for this is that the Partnership is a contract, and not a separate legal entity independent of its members.
• Court order: Breach of essential term of partnership agreement; Irreparable breach of relationship of trust between the partners; No prospect of profits; Personal circumstances (e.g. long illness); Sequestration of partnership estate; Sequestration of partner’s private estate
• Illegality: If the objectives of the partnership becomes illegal. (e.g. due to legislation)
• Impossibility: If the objectives of the partnership becomes impossible without fault of any of the partners.
After termination of a partnership, the partnership must be liquidated. Liquidation I the converting into cash (money) all assets, the payment of creditors and the recovery of any deficit from the partners or the distribution of any surplus between them.
