LEGAL ADVICE FOR PARTNERSHIPS

One of the main differences between a limited company and a partnership is that the partners are primarily liable for arrangements entered into by the partnership. Whether partners are jointly and severally liable for the actions of another partner depends on a number of factors. Usually however:

• Partners are jointly responsible for the contractual debts of a partnership.
• The estate of a deceased partner has several liability for the debts of the firm to the extent that they are not otherwise satisfied.
• Wrongful acts or omissions, such as torts, of any partner acting in the ordinary course of the business with the authority of the other partners, gives rise to joint and several liability.

Partnerships are treated as transparent for most tax purposes meaning that the activities of the partnership are treated as carried on by the individual partners and not by the partnership as a body. As such, it is the individual partners who are liable to pay tax on their share of the profit or losses.

Partnership property is property brought into the partnership for the purpose of partnership business. As a partnership cannot own property, individual partners will own property on behalf of the partnership. It is important to set out clearly what property is owned by individual partners on behalf of the partnership and what property belongs to individual partners personally. This will be important on the insolvency of the partnership and/or the bankruptcy of individual partners.

Partners owe fiduciary duties to each other including a duty to act in the utmost good faith and honestly towards each other, and not to put themselves into a position where their duty to the firm and their own interests conflict. Additionally, a partner must account for all profits made by him from carrying on any business of the same nature as and competing with that of the firm, without the consent of the partners.

If you don’t have a Partnership Agreement the business will be governed by the Partnership Act 1890 (the Act). The Act is however lacking in parts and, although it is not a mandatory requirement, we advise that a partnership agreement is entered into between partners otherwise default provisions may apply. There are several areas to consider:

• Fixed Capital. The amount of a partner’s fixed capital (i.e. the amount introduced by each partner).
• Share of profits and losses. Unless the partnership agreement says otherwise, all partners share equally in the profits and must contribute equally towards the losses, whether capital or income. It is usual for the partnership agreement to set out how shares of profits are distributed.
• New Partners. The partnership agreement should set out how a new partner may be admitted otherwise it will require unanimous consent. At law, an incoming partner does not acquire liability for anything done before admission, but it is usual for new partners to agree to take on existing liabilities of the firm.
• Retirement. A partner has no right to retire from the partnership unless: the partnership agreement allows for it, it is with the unanimous consent of all partners, or for    partnerships at will – by notice. The partnership agreement should set out how a            partner may retire, what happens on the death of a partner, and how a partner can be expelled from the partnership.
• Post termination restrictions. It is important that a partnership agreement also deals with post termination restrictions preventing an outgoing partner from competing with the business of the firm within a defined geographical area and for a set period of time.

If a Partnership Agreement is poorly drafted, disputes can arise over the true meaning and interpretation of its terms and the nature and extent of the partners’ rights and responsibilities.