Business Law - Business Structures - Partnerships

What is a “Partnership”?

The term “Partnership” is defined in the Partnership Act 1892 (the “Act”) as the relationship that exists between persons carrying on business in common with a view of profit. From this definition, the essential elements of a partnership are:

1. Carrying on of business;
2. In common;
3. With a view to profit.

While the above elements provide guidance as to the essential elements found in a partnership, the Act provides further guidance as to the rules to be applied in determining whether a partnership does or does not exist. The rules relate to common ownership of property, sharing of gross profits and profit sharing.

Creation of a Partnership

There are no special rules in relation to the creation of a partnership. Parties can create a partnership either orally or by writing in the form of a deed or simple contract. It is important to note however that a partnership may also be inferred through the conduct of the parties.

In normal business, parties who wish to enter into partnership with one another would generally enter into a formal written partnership agreement. Such an agreement would include the details of the parties, the type of business that the partnership is to be engaged in, how profits will be shared, how the accounts will be administered, how the business is to be managed and the authority of the partners, how disputes between partners should be resolved and how the partnership can be dissolved. Without any form of agreement, the partnership will be governed by the terms of the Act.

Liability

Liabilities of partners in a partnership are joint and several. What this means is that the liabilities of the firm become the liability of the partners together (joint) or individually (several).

Fiduciary Relationship

Because the acts of a partner have the effect of binding all the other partners, the law recognises certain duties that each partner owes to the other. These duties include the following:

• Full disclosure;
• Account for any benefit derived without the consent of the other partners from any transaction concerning the partnership or for any use by the partner of partnership property, names or business connection;
• Non competition

Dissolution of the Partnership

Subject to the terms of the partnership agreement, a partnership may be dissolved upon the happening of any of the following things:

1. The partnership was entered into for a limited period and that time has now expired; or
2. The partnership was entered into for a specific purpose and the purpose has been fulfilled; or
3. A partner has died;

4. Bankruptcy of a partner

A court may order the partnership to be dissolved on some grounds including: 

1. Incapacity of a partner;
2. Where a partner is guilty of conduct that is calculated to affect the business prejudicially;
3. Where a partner has been persistently breaching the terms of the partnership agreement;
4. Where it is just and equitable.

Distribution of Assets on Dissolution of Partnership

Subject to the terms of the partnership agreement, the Act provides that the following rules apply to the settling of accounts of the partnership:

a. Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits.

b. The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

1. In paying the debts and liabilities of the firm to persons who are not partners therein.
2. In paying to each partner ratably what is due by the firm to the partner for advances as distinguished from capital.
3. In paying to each partner ratably what is due from the firm to the partner in respect of capital.
4. The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.

How can we help?

We understand that partnerships can be a complex area. Whether you are in a current partnership and require your current agreement reviewed or amended or if you are thinking about entering into a partnership and require advice and an agreement drawn, we can assist you to identify the issues and prepare a document that is tailor-made to your business.