Guidance note for partnership law: the basics

6 August, 2018

A partnership is a collection of individuals ‘carrying on a business in common with a view to profit’.

This guidance note discusses the basics of partnership law.

A partnership is a collection of individuals ‘carrying on a business in common with a view to profit’ . 

A traditional partnership (unlike a LLP) is not a separate legal entity and each partner is jointly and severally liable with the other partners for all debts or obligations owed.

The best way to think about a traditional partnership is to view each partner as an agent acting on behalf of all the partners.  When contracting with other third parties the partner is acting on behalf of all the partners and can bind them to a contract without their express agreement.

If you trade as a partnership then best practice is to enter into a partnership agreement that is tailored to your circumstances and sets out the rights and obligations of each of the partners.

In the absence of any agreement, the terms of the Partnership Act 1890 (the Act) will apply.  The following paragraphs outline some of the key issues that any partnership should consider and some of the default provisions that apply under the Act.

Unless otherwise agreed, all profits and losses of the partnership will be shared equally between the partners. 

If it is intended to divide the profits in anything other than an equal share then this should be documented.  It is also important to consider whether any partners may make drawings on account of profits, if some profits should be retained to invest in the future of the partnership or to help mitigate losses in the event of an economic downturn. 

The partners are jointly and severally liable for all the debts and liabilities of the partnership, without limitation. 

This means that each partner could be sued individually or jointly with all the other partners.  If one partner is pursued then they may seek a contribution from the other partners, but this will only be effective if the other partners have the ability to pay their share of the debt.

The partners owe each other fiduciary duties and a duty of upmost good faith.  This includes:

  • To promote the success of the business.
  • To avoid a conflict of interest and not to compete with the partnership business without the (fully informed) consent of the other partners.
  • To render true accounts and deliver up any profits received.
  • To disclose to the other partners any information that may adversely affect the partnership.

In the absence of an agreement to the contrary, all partners have a right to take part in the management of the business and the decisions that are taken. 

Changes to the nature of the partnership (e.g. a change to profit share, or admitting another partner) require the consent of all the partners.  This can cause difficulties, especially in larger partnerships, and it is normal for a partnership agreement to amend the default provisions that are implied under the Act.

The Act does not include a dispute resolution mechanism and if a deadlock arises then the only way forward can be to dissolve the partnership.  

It is common for a partnership agreement to specify a detailed dispute resolution mechanism to avoid this problem.

It is important to agree what are partnership assets and what assets belong to the individual partners.  This is especially important where one partner is contributing land or other assets upon the formation of the partnership. 

On the dissolution of a partnership in the absence of any agreement all the partnership assets will need to be sold and the partners will be entitled to any residue after any partnership losses, debts, advances and expenses of the dissolution are paid.

Unless otherwise agreed, the admission of a new partner requires the unanimous consent of all the partners.

Where a new partner joins the partnership it is good practice to re-evaluate the terms of any partnership agreement and require them to sign a deed of adherence.

The Act does not include a power to expel a partner.  It is important therefore to reach an agreement on the circumstances upon which a partner may be removed from the partnership.  For example, in the event of their bankruptcy, mental incapacity, a material breach of the partnership agreement or poor performance.

The Act does not allow for a partner to retire, so in the absence of an agreement the death or retirement of a partner will require the dissolution of the partnership.

In any partnership agreement it is important to consider what restrictions should be placed on a partner who decides to retire from the partnership, or if it is necessary for the other partners to expel them.  In the absence of any agreement there is little to prevent a departing partner from setting up in competition with the partnership.

The partners may employ staff, but a partner cannot also be employed by the partnership (you cannot employ yourself).  The partners will be liable for any employment claims.

There may be some circumstances where a partnership is deemed to dissolve (e.g. the death of a partner) or by agreement between the partners.  On dissolution any residue (if any) will be paid to the partners after any losses, debts and advances have been paid.  The partnership agreement may specify how this will be split, but in the absence of any agreement this will be in accordance with the partners’ profit sharing ratios.

If you require further guidance please contact Tom Bourne at tom.bourne@crippspg.co.uk or on +44 (0)1892 506 099