This blog will explore General Partnerships and outlining all you need to know from identifying a partner to what the Partnership Act entails.
The Partnership Act – Key Observations:
- There will often (sensibly) be a written agreement between the partners, setting out the rights and duties of the partners between themselves although it is not a legal requirement to have a written agreement in place.
- The Partnership Act sets out a number of provisions that will apply if no specific agreement is entered into by the partners. Essentially these default provisions which may be varied by the consent (or a course of conduct) by all the partners.
- As a partnership is not a separate legal entity from its partners it cannot acquire rights, incur obligations or hold property in its own right.
- It is important to distinguish between partnership property and property that personally belongs to an individual partner, as this affects the rights of creditors of the partnership and creditors of the partners.
- Each partner is an agent of the partnership and their other partners for the purposes of the partnership’s business and can bind the partnership, and the other partners, by any action they take in the ordinary course of business.
- Each partner owes a duty of good faith to their fellow partners in all partnership dealings and the relationship between partners is of a fiduciary nature.
- A partner is jointly liable with the other partners for all the debts and obligations that the partnership incurs while they are a partner.
- The extent of each partner’s interest in a partnership depends on the terms of the agreement between the partners and, in the absence of any agreement, all partners are entitled to share equally in the capital and profits of the partnership.
Defining – Who is a Partner?
The partners in a partnership are the persons who are ‘carrying on a business in common with a view of profit’.
It will often seem clear who the partners are in a partnership. If a partnership agreement is in place it should indicate the names of the partners. However, labels given by a partnership (such as ‘partner’, ‘salaried partner’ or ‘fixed-share partner’) are not conclusive in determining a person’s status.
Where an individual receives a salary that is not dependent on profits, it may indicate that the person is an employee rather than a partner. The courts have ruled it legally impossible for a partner to also be an employee the rational being for a partner to be an employee, would require the partner to be employed by himself and his co-partners.
As partners are not employees and (probably) not workers either, ‘true’ partners in a general partnership are not entitled to the statutory protections and rights we assisted with being employed.
Unlike the formation of a limited company, it is not necessary to file any documents, register any information or complete any formalities. Two people may form a partnership by simply starting to carry on a business together and sharing the profits.
General Partnership Agreements – Default Provisions
The following provisions will apply to each partner in the absence of an agreement to the contrary:
- entitled to share equally in the capital and profits
- jointly liable to contribute equally to any losses
- can take part in the management
- consent of all the partners is needed to admit new partners
- no entitlement to remuneration
The partnership itself must indemnify partners for payments and liabilities incurred in the ordinary and proper conduct of the partnership’s business.
Why have a written Partnership Agreement if we don’t legally have to have one?
Parker Arrenberg Solicitors always urge our clients to have their intentions with others written down in advance of entering any relationship or contract. A partnership is no different. By having all your agreed terms of the business relationship set out in one document it avoids application of any inappropriate default provisions within the Partnership Act.
You will recall that a default provisions within the Partnership Act stipulate that all profits are to be shared equally. If your intention is for a 60 /40 profit share between you and your partner and you do not have this agreement written down anywhere – how can you enforce it? Either you won’t be able to if your partner doesn’t agree, or it will cost significantly going down the litigation route.
A partnership agreement is a private document. Our solicitors suggest including agreed terms in relation to the following:
- The partnership business
- Status of each partner
- Capital contributions
- Profit-sharing
- Commencement and duration
- Partnership property
- Management and voting
- Admission of new partners
- Retirement
- Termination and winding-up of the partnership
- The exit and expulsion of partners
- Division of losses
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Parker Arrenberg Solicitors provides astute legal advice and the drafting of legal agreements, policies and documents to address your immediate and ongoing business needs.
We can assist whether you are a new start-up or an established business. We work for you to design ‘best practice’ doctrines ensuring and securing a smooth running and efficient workplace.
Parker Arrenberg Solicitors provide sensible commercial legal advice and draft the agreements you need in place to reduce areas of dispute or at least provide a mechanism for the parties to resolve a dispute. We can help you grow and evolve safely in the knowledge that you, your business and your brand are protected and stand on strong legal ground to move forward.
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