Partnership Act

Partnership Act 1890

A partnership is the relation which subsists between persons carrying on a business in common with a view of profit”.Section 1 of Partnership Act 1890.

A partnership arises when a number of individuals are in business together, rather than in an employer-employee relationship. The legislation governing partnerships is the Partnership Act 1890.

A partnership relationship can only arise by mutual consent. The agreement which gives rise to the partnership relationship may be express or inferred from the parties’ conduct.

Under the Partnership Act 1890, there is no formal registration process for partnerships and no obligation to make the accounts of the business public. Unlike a company, there is requirement of a memorandum of association or articles of association.

A partnership need not necessarily be recognised as such by the parties since the existence of a partnership depends on whether or not the definition contained in section 1 of the Partnership Act 1890 applies. Section 1 states that a ‘partnership is the relation which subsists between persons carrying on a business in common with a view of profit’.

An example of the effect of section 1 is the case of Khan v Miah [2000] 1 WLR 2123 in which the House of Lords held that a partnership in the case had been established even though the business in question (a restaurant) had not opened before the partnership between the parties had broken down.

Partnerships are generally created for the following:

1)a specific purpose or for a set amount of time;

2)for it to continue for as long as the parties wish (‘partnership at will’)

Partnerships do not enjoy separate legal personality such as other company structures and that means that the liabilities for the debts of the partnership are unlimited and are shared by the partners jointly and severally. Therefore, if the debts of the partnership become un-manageable the directors may become personally liable and may even be liable for their partners share of the debt.

Under the Partnership Act 1890, the following legal rights and responsibilities are enshrined to the partners:

1)the right to be involved in making decisions which affect the business;

2)the right to share in the profits of the business;

3)the right to examine the accounts of the business;

4)the right to insist on openness and honesty from fellow partners;

5)the right to veto the introduction of a new partner; and

6)the responsibility for sharing any losses made by the business.

These rights and responsibilities can be varied by a ‘Partnership Agreement’. A partnership agreement should be seen as a key document in any partnership as this enshrines the rights and responsibilities of the partners and can act as a constitution for the business.

Whereas the Partnership Act 1890 sets out a basic framework for the governance of a partnership, a partnership agreement can be much more specific to the business being pursued by the partners.

In the absence of a partnership agreement, all profits and losses in the partnership are to be shared equally between all the partners irrespective of how much work they have individually put into the business. Under English law, any change in the make up of the partnership automatically terminates that partnership. In the absence of an agreement to the contrary, the withdrawal of a partner or a partner’s death or bankruptcy means that the partnership is dissolved. If a new partner is admitted to the partnership, the partnership ends and a new one is created.

A retired partner remains liable for debts incurred in the partnership before his departure and remains so after his departure if it appears to the third party that he is still a partner or holds himself out to be one. A new partner entering the partnership is not liable to creditors for any debt incurred before his joining the partnership.

A partnership agreement is a key document and, for the reasons mentioned above, should be drafted at the beginning of any partnership.

Overall, a partnership can be a very successful way in which to run your business due to the relative ease of incorporation, not being required to publicise the accounts of the business and the non-disclosure of partners. However, due to the antiquated Partnership Act 1890, in the 21st century business world, the only suitable way for the partners to protect themselves and their business is to have a partnership agreement in place which can shore up the partners rights and responsibilities to the partnership.

Partnership Act 1890

A partnership is the relation which subsists between persons carrying on a business in common with a view of profit”.Section 1 of Partnership Act 1890.

A partnership arises when a number of individuals are in business together, rather than in an employer-employee relationship. The legislation governing partnerships is the Partnership Act 1890.

A partnership relationship can only arise by mutual consent. The agreement which gives rise to the partnership relationship may be express or inferred from the parties’ conduct.

Under the Partnership Act 1890, there is no formal registration process for partnerships and no obligation to make the accounts of the business public. Unlike a company, there is requirement of a memorandum of association or articles of association.

A partnership need not necessarily be recognised as such by the parties since the existence of a partnership depends on whether or not the definition contained in section 1 of the Partnership Act 1890 applies. Section 1 states that a ‘partnership is the relation which subsists between persons carrying on a business in common with a view of profit’.

An example of the effect of section 1 is the case of Khan v Miah [2000] 1 WLR 2123 in which the House of Lords held that a partnership in the case had been established even though the business in question (a restaurant) had not opened before the partnership between the parties had broken down.

Partnerships are generally created for the following:

1)a specific purpose or for a set amount of time;

2)for it to continue for as long as the parties wish (‘partnership at will’)

Partnerships do not enjoy separate legal personality such as other company structures and that means that the liabilities for the debts of the partnership are unlimited and are shared by the partners jointly and severally. Therefore, if the debts of the partnership become un-manageable the directors may become personally liable and may even be liable for their partners share of the debt.

Under the Partnership Act 1890, the following rights and responsibilities are enshrined to the partners:

1)the right to be involved in making decisions which affect the business;

2)the right to share in the profits of the business;

3)the right to examine the accounts of the business;

4)the right to insist on openness and honesty from fellow partners;

5)the right to veto the introduction of a new partner; and

6)the responsibility for sharing any losses made by the business.

These rights and responsibilities can be varied by a ‘Partnership Agreement’. A partnership agreement should be seen as a key document in any partnership as this enshrines the rights and responsibilities of the partners and can act as a constitution for the business.

Whereas the Partnership Act 1890 sets out a basic framework for the governance of a partnership, a partnership agreement can be much more specific to the business being pursued by the partners.

In the absence of a partnership agreement, all profits and losses in the partnership are to be shared equally between all the partners irrespective of how much work they have individually put into the business. Under English law, any change in the make up of the partnership automatically terminates that partnership. In the absence of an agreement to the contrary, the withdrawal of a partner or a partner’s death or bankruptcy means that the partnership is dissolved. If a new partner is admitted to the partnership, the partnership ends and a new one is created.

A retired partner remains liable for debts incurred in the partnership before his departure and remains so after his departure if it appears to the third party that he is still a partner or holds himself out to be one. A new partner entering the partnership is not liable to creditors for any debt incurred before his joining the partnership.

A partnership agreement is a key document and, for the reasons mentioned above, should be drafted at the beginning of any partnership.

Overall, a partnership can be a very successful way in which to run your business due to the relative ease of incorporation, not being required to publicise the accounts of the business and the non-disclosure of partners. However, due to the antiquated Partnership Act 1890, in the 21st century business world, the only suitable way for the partners to protect themselves and their business is to have a partnership agreement in place which can shore up the partners rights and responsibilities to the partnership.

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