BUSINESS LAW
LECTURE 2
PARTNERSHIPS
WHAT ARE WE GOING TO
STUDY?
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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 1890
states............
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
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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 1890
If 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