Business Structures - Partnerships

by The FindLaw Team

Business partnerships

Business partnerships are generally governed by the Partnership Act 1908 (the Act).Partnerships are defined by the Act as relationships between people carrying on a business in common, with a view to profit.

Some business relationships are not partnerships under the Act. For example, owning a property in common with others does not in itself give rise to a partnership. Similarly, sharing gross returns does not in itself create a partnership. Sharing the profits of a business, on the other hand, does indicate the existence of a partnership, with some exceptions.

The Act previously made separate provision for special partnerships.Special partnerships are now known as limited partnerships.Limited partnerships are special business vehicles commonly used for venture capital purposes. Limited partnerships are governed by special rules set out in the Limited Partnerships Act 2008.They are not included in the term “partnerships” in this article.

Businesses that operate as partnerships are subject to different rules than sole traders, companies or trusts. Some of the rules that apply to partnerships under the Act can be modified by formal partnership agreements.

Formation of partnerships

There are no special formalities for establishing a partnership. However, manypartnerships have a formal partnership agreement.A formal partnership agreement enables the partners to modify some of the provisions of the Act that would otherwise apply automatically.

Consequences of partnership

A partnership is not generally considered by the law to be a separate legal entity, distinct from its partners. In most legal contexts, the acts and omissions of a partnership are consequently treated as the acts and omissions ofthe partners.However, the wrongful acts or omissions of partners may in some circumstances become the liability of both the partners and the partnership.

Every partner is collectively liable, with all the other partners, for partnership debts incurred while a partner.

Relationship betweeen partners

The relationship between partners is a fiduciary relationship, at common law.As a consequence, partners are under a duty to treat each other fairly, and to act in good faith towards each other.

Additional statutory obligations are imposed on partners under the Act.Partners are under a duty to provide each other with true accounts and full information.Partners are also under a duty to account to each other for benefits derived from use of the partnership’s name, property or business connections. Partners must also account to each other for the profits of any business carried on in competition with the partnership, without the partnership’s consent.

Relationship between partners and third parties

The Act treats every partner as an agent of the partnership. It also treats every partner as an agent of each of the other partners. If one partner executes a document or takes any action relating to the partnership’s business, in the name of the partnership, that document or action will generally bind the partnership and all its partners, with limited exceptions.

Partnership profits

Because a partnership is not a separate legal entity, partnerships are not liable to pay income tax on partnership profits.Partnership profits are instead distributed to the partners in allocated shares. Those individual partners are then liable to pay income tax on their allocated share of profits.

Dissolution of partnerships

The dissolution provisions of the Act apply automatically, unless they are modified by the terms of a partnership agreement. The Act provides for dissolution upon:

  • expiry of a fixed term;
  • termination of the partnership’s undertaking;
  • notice being given by any partner;
  • the death or bankruptcy of any partner;
  • any partner’s share of the partnership property becoming subject to a charge to secure that partner’s personal debt;
  • the partnership becoming illegal;
  • court declaration in certain circumstances, including the insanity or incapacity of a partner, prejudicial behaviour by a partner, or persistent default by a partner.

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