Keith Mack
Partnership law in the United Kingdom outlines the formation and governance of partnerships. A partnership is defined as a business relationship between at least two people or entities, who share responsibility and jointly pursue profit. Partners are liable for the partnership's debts and own property in common. The Partnership Act 1890 forms the basis of partnership law, though it does not cover all aspects, and separate legislation addresses specific scenarios, such as insolvency. The act distinguishes partnerships from clubs and societies by their profit-seeking motive. Partnerships can be formed through oral agreement, written document, or conduct, and each partner is entitled to participate in management and profits.
| Characteristics | Values |
|---|---|
| Definition | "The relation which subsists between persons carrying on a business in common with a view to a profit." |
| Minimum number of partners | Two |
| Maximum number of partners | Unlimited |
| Partner liability | Jointly and severally liable for the debts of the others; no limited liability. Only sleeping partners may have limited liability. |
| Capital | The amount contributed by the partners, usually expressed in cash terms. |
| Property | Matters are largely decided by case law. It is left up to the partners to agree on what is and isn't partnership property. |
| Borrowing | Under Scots law, a partnership is a distinct legal entity and can borrow money from a bank in its name. English law only allows borrowing in the names of individual partners. |
| Tax returns | The "nominated partner" is responsible for managing the partnership's tax returns and keeping business records. |
| Management | Each partner is entitled to participate in the management of the business. |
| Profit | Each partner receives an equal share of the profit and pays tax on their share. |
| Indemnity | Each partner is entitled to an indemnity regarding liabilities assumed in the course of business. |
| Expulsion | No partner can be expelled by the other partners. |
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What You'll Learn
Partnership Act 1890
In the United Kingdom, a partnership is a form of business association that arises when people carry on a business with a view to making a profit. Before the Partnership Act 1890, most of the law relating to the operation and status of partnerships was based on case law precedent.
The Partnership Act 1890 is an act of the Parliament of the United Kingdom that provides a legal framework for partnerships in England and Wales. It defines a partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". This can be established through conduct, oral agreement, or a written contract known as a partnership agreement. The act outlines the nature of partnerships, the rights and duties of partners, and their relationship with third parties.
Each partner is entitled to participate in management and has an equal share of profits, liabilities, and indemnity in respect of liabilities assumed in the course of business. Partners also have the right to not be expelled by other partners. A partnership ends upon the death of a partner, unless agreed upon prior to the death. The act does not cover all aspects of partnership business, and some matters are addressed by separate legislation.
The minimum membership of a partnership is two, and there is no maximum number of partners. A partnership is distinct from a limited company, as there is no limited liability and the partnership does not have a separate legal identity. Partners are jointly and severally liable for the debts of the partnership.
The Partnership Act 1890 also distinguishes between general partners and limited partners. A general partner is treated the same as a partner under the act and is liable for the debts and obligations of the firm. On the other hand, a limited partner enjoys limited liability as long as they do not participate in business management. If a limited partner does engage in management, they will be treated as a general partner and will be liable for any debts or obligations incurred under their management.
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Limited Partnerships Act 1907
In the UK, a partnership is defined as a "relation that subsists between persons carrying on a business in common with a view to a profit". Partners share the business's profits, and each partner pays tax on their share. Notably, a partner does not have to be a person; for instance, a limited company can be a 'legal person' and a partner.
The Limited Partnerships Act 1907 established limited partnerships. A limited partnership is similar to a standard partnership, but there are two types of partners: general partners and limited partners. A general partner is liable for the debts and obligations of the firm, whereas a limited partner enjoys limited liability. If a limited partner partakes in business management, they will be treated as a general partner and will be liable for the debts and obligations incurred under their management.
To be recognised as a limited partnership, the partnership must be registered with Companies House. If it is unregistered, it will be treated as a standard partnership.
It is worth noting that the law governing partnerships under the Partnership Act 1890 and the Limited Partnerships Act 1907 does not typically apply to limited liability partnerships (LLPs). However, an exception exists regarding taxation, where LLPs are treated as partnerships.
In terms of capital, each partner's interest in the partnership's capital relates to their contribution. This is distinct from their interest in the partnership's assets, which is based on their share as outlined in the partnership agreement. The partnership agreement also defines what constitutes partnership property. Notably, the partnership's capital cannot be altered without the consent of all partners.
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Partner liability
In the UK, partnerships are governed by the Partnership Act 1890, which defines a partnership as "the relationship that subsists between persons carrying on a business in common with a view of profit". Partners are jointly and severally liable for the debts and obligations of the firm, meaning that each partner can be made to pay all the debts of the partnership. This is in contrast to a limited company, where there is limited liability and the company has a separate legal identity.
Under the Partnership Act 1890, each partner is entitled to participate in management and has an equal share of profits. Partners also have an indemnity regarding liabilities assumed in the course of business and the right not to be expelled by other partners. However, partners are jointly and individually liable for the debts and liabilities incurred by the partnership. This means that if one partner incurs a debt on behalf of the partnership, all the other partners are also responsible for that debt.
The concept of 'apparent authority' is important in partnership law. If a partner acts without actual authority but with apparent authority, the partnership is bound by the transaction. In such cases, the other partners may recoup any losses they suffer as a result from that partner. The partnership may also be legally responsible for the acts of one of the partners that they didn't authorise, as long as it seemed to outsiders that the partner was authorised to act on behalf of the partnership.
It is important to note that there are different types of partnerships, such as general partnerships and limited partnerships, and the liability of partners can vary depending on the type of partnership and the jurisdiction within the UK (English law, Scots law, or Northern Irish law). For example, under Scots law, a partnership is a distinct legal entity and can borrow money from a bank in its own name, while English law only allows borrowing in the names of individual partners. In a limited partnership, there are general partners and limited partners, with general partners having unlimited liability and limited partners having limited liability as long as they do not partake in business management.
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Capital contributions
In the UK, a partnership is defined as a "relationship that subsists between persons carrying on a business in common with a view to a profit". Partners share the business's profits and each partner pays tax on their share.
The current account balance is not considered capital contributed. An undrawn profit share is also not considered capital, but members can agree to convert it into capital. If a member is entitled to draw a sum out before they cease to be a member, that sum does not count as part of their capital contribution. If a member takes out insurance to cover a possible loss of capital, the sum covered is not considered capital contributed.
The size of the firm usually determines the size of the capital contribution. For smaller firms, the contribution may be as low as £50,000, rising to around £150,000. For larger firms, it may be as low as £100,000, rising to around £350,000, but it could be much higher. Most new partners will obtain a partnership capital loan, which is openly available from high-street banks and some specialist legal sector funders.
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Partnership property
The Act states that all partners are entitled to share equally in the capital and profits of the business and must also contribute equally to any losses. Partners are jointly and severally liable for the debts of the partnership, and each partner has a right to participate in management and is protected from expulsion by other partners.
The significance of partnership property is closely tied to the manner in which the accounts of a partnership are produced. "Capital" refers to the sum of money invested by a partner, which is not to be returned until the dissolution of the partnership or the partner's departure. It is distinct from an "advance", which is a sum of money loaned to the partnership that is expected to be repaid. Income profits arise from the usual trading activities of the partnership, while capital profits arise from the sale of partnership property outside of normal trading, such as the sale of land.
Partnership agreements often include provisions regarding the disposal of interests in partnership property, particularly in the event of a partner's death or retirement. These provisions can impact inheritance tax calculations, and HMRC will advise on the treatment of partnership property in these cases.
It is important to note that the determination of partnership property can be complex, and case law plays a significant role in establishing the rights and interests of partners in specific situations.
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Frequently asked questions
A partnership is defined in S1(1), Partnership Act 1890, as "the relation which subsists between persons carrying on a business in common with a view of profit". The minimum membership is two, and partners are jointly and severally liable for the debts of the others.
A general partner is liable for the debts and obligations of the firm, whereas a limited partner enjoys limited liability, meaning they will not be liable for any debts or obligations beyond their investments, provided they do not partake in any business management.
A limited liability partnership (LLP) is a legal person in its own right, distinct from the persons who own it. LLPs are treated as partnerships for tax purposes.
