BUSINESS LAW

LECTURE 2

PARTNERSHIPS

WHAT ARE WE GOING TO STUDY?

• What is a partnership?

• The regulation of a partnership

• The relationship between partners’

• Ending a partnership

• llps

What is a partnership?

A group of people carrying on business together - or as the

Partnership Act 1890states............

DEFINITION OF A PARTNERSHIP

‘partnership is the relation which subsists between persons carrying on a business in common with a view to profit’ (S.1 PA 1890):

It is created simply by a group of people agreeing to go into business together. There doesn’t need to be anything in writing or any special forms completed. Valid partnerships can be made by word of mouth or implied by the conduct of the parties

What type of businesses operate as partnerships?

• Professions

eg dentists

physiotherapists

accountants

• Friends starting out in business

• John Lewis?

How do you identify a business run as a partnership?

• Remember the business names provisions in the CA’06

• It is common for the name of a partnership to end with the suffix ‘& Co’

• PA1890 provides that persons in a partnership are collectively called a ‘firm’

A firm’s personae

• It is NOT a separate entity from the partners

• It has NO separate legal personality or existence in its own right

• It cannot own assets in its name nor incur liabilities in its name.

The Regulation of a Partnership

This is done by:-

1.The partnership agreement; and

2.The PA 1890

1. The Partnership Agreement

• Can be in any form – common to be in writing to avoid disputes and lets the partners specify the exact nature of their entitlements and obligations

• Can go a long way to helping to ensure that the business runs smoothly in the future.

What should go in a Partnership Agreement?

It should cover areas such as the:i. Nature of the business.ii. Name of the firm.iii. Capital contributions to be made by the individual

partners.iv. Drawing up of the business accounts.v. Method to be used for determining and sharing any

profits.vi. Method to be used for dissolving the partnership.vii. Method to be used for settling disputes between the

partners (usually arbitration).

2. PA 1890If a partnership agreement is silent on a matter then the terms of the PA1890 prevail - this can result in awkward situations and can lead to disputes between partners.

EG under the default provisions of the Act:

A partner is not obligated to participate in the running of the business in any way, which means that they do not have to turn up to work!

Partners receive an equal share of the profits of the business, no matter how much time of effort they have put into it.

Partners cannot retire. If a partner dies or decides to leave the partnership, the partnership must be dissolved, assets distributed equally, and then a new partnership (or other business) created. The process is by no means simple, and can be extremely costly.

Partners cannot be expelled from a partnership.

The Relationship Between Partners

It is contractual and notwithstanding what is in the Partnership Agreement the PA1890 implies additional rights and duties on the partners including

FIDUCIARY DUTIES

S.5 PA 1890

Mercantile Credit v Garrod [1962].

Each partner is an agent of the partnership and the other partners for the purpose of the business of that partnership (S.5 PA 1890).

A partner may make contracts which bind the other partners – but did he have the authority to do so?

Partners have authority to....

– Sell the firm’s goods– Buy goods which the firm might normally

require– Engage employees– Take payment of debts due to the partnership– Pay debts owed by the partnership and draw

cheques– Employ a solicitor to represent the firm in legal

action

Recap

A partnership agreement is an internal document between the partners and does not necessarily affect the rights of third parties contracting with the partnership.

E.g. If a partnership agreement places limitations on the contractual capacity of a partner, it is effective between the partners but will not bind a third party contracting with the partnership providing they had no knowledge of the limitation.

LIABILITY OF PARTNERS FOR PARTNERSHIP DEBTS

Joint liability - (S.9 PA 1890)

makes each partner jointly liable with the other partners for any debt or obligation of the

firm

Partners have unlimited liability for the firm’s debts

A Partner’s Negligence

‘jointly and several liability’

(S.10 PA 1890) 1.Each partner is vicariously liable for the

wrongful/ harmful acts of another partner provided that the partner was acting within his authority or that the act was done whilst in the ordinary course of the firm’s business

2.The injured person can sue each partner in turn or all the partners at the same time until he has recovered all his compensation. Partners have unlimited liability for such claims

Ending a partnership

this can happen for a variety of reasons specified in:-

• the partnership agreement,or

• in the PA 1890; or

• a court order

Limited Liability Partnerships

• These are partnership/ company hybrids – formed under the

Limited Liability Partnerships Act 2000

How do they work?

• An LLP needs to be registered + needs an incorporation document

• Then it becomes a legal person and has its own identity with each partner’s liability limited to the amount of his investment in the firm

• It enjoys all the advantages of incorporation and relatively few of the disadvantages

Should I Join A Partnership?

Look at the good and bad points on pages 17 + 18 in your lecture notes and decide

for yourself!

You may need to wait until you have learnt about companies before making up your

mind