Partnerships - Legal Information

Partnership is the relationship between persons engaged in business in common with a view to profit. A partnership involves a contract - which need not be written - between the partners to engage in that business. The business may be any trade, occupation or profession unless otherwise prohibited by law. Partnerships are governed principally by the Partnership Act 1890 although review of that act is underway.

A group of partners are collectively known as a "firm".

A partnership may exist for a fixed period of time, or for a specific purpose. However, most partnerships exist for an indefinite time period, with new partners joining and other partners leaving.

The relationship between partners is often governed by a formal written agreement - usually a deed, known as a partnership deed. The deed should regulate the nature of the business, the obligations of the partners to each other, the duration of the partnership and how a partner may retire from the partnership. However, there is no obligation for the partners to enter into a deed, in which case the partnership is "at will".

Clough & Willis recommends that partners enter into a formal deed. Such deeds can be simple and straightforward - but they may need to be complex documents dealing with specific issues such as profit share, capital business responsibilities, promotion, demotion, retirement, expulsion and many other matters. Clough & Willis advises firms on the options open to them, drafts formal deeds of partnership and will review and update existing deeds. Deeds should be regularly reviewed and updated as the circumstances of the partnership, the business environment and the law develop and change.

Partnerships and Third Parties

Generally each partner may bind the partnership in relation to third parties. An employee who is held out as a partner may bind the partnership in relation to third parties even where the terms of his/her employment do not permit this.

Each of the partners is jointly and severally liable for the debts of the partnership as a whole. What this means is that each partner can be sued for the debts of the partnership. There is no limit to the partners' personal liability: each partner may be sued individually and may be pursued for the debt. Therefore partners are said to be personally responsible for partnership debts, and claims against them may exceed the ability of the partnership to indemnify or repay the debt. Clough & Willis defends claims brought against partnerships in relation to partnership debts.

A partnership may be made bankrupt.

Partnership Disputes

Ordinary partnerships are presumed by law to be to be based on mutual trust and confidence; partners must account for profit received and must not compete with the business of the firm.

Unfortunately, even the most united partnership may fall out and disputes may occur. For example partners should bear any losses in the same proportion as they take profits; however, partners may fall out over the debts of the business and Clough & Willis acts for partners making or defending such claims. Partners are each entitled to the accounts of the business; disputes may revolve around the partnership share and Clough & Willis advise partners and former partners about those disputes.

An employee who is held out as a partner faces liability for the debts of the partnership: they may be entitled to an indemnity for the owners of the business (known as equity partners). Employee-partners may sue the partnership in the event of a breakdown of the business relationship. Clough & Willis acts for firms and employee partners in such cases.

A partner may be expelled from a partnership. The agreement between the partners may provide for specific circumstances when this will occur, and for a specific method to be used. Alternatively the partners in a firm may simply decide to expel a partner - and a dispute usually follows that decision. Clough & Willis advise partnerships and expelled partners on their obligations and rights.

A partnership may be brought to an end - known as dissolution - by formal agreement, by operation of law or by act. A partner may serve a notice of dissolution and Clough & Willis can advise upon and draft such notices.

A partner may petition the Court to dissolve a partnership. Clough & Willis advise on such claims and pursue or defend them when brought.

Special Types of Partnership

In addition to the type of partnership set out above there are Limited Partnerships where some but not all partners' liability is limited to the amount they contribute to the firm.

There is also Limited Liability Partnership (LLP) where the personal liability for members for business debt is limited.

Clough & Willis advises on the creation and running of such specialised partnerships.

The law relating to partnership is complex and the notes above are no more than a simple introduction. Clough & Willis advises on:

• the formation of firms and determining whether a partnership exists
• claims brought by or against partnerships
• relationships between partners
• admission and expulsion of partners
• dissolution

For an objective and practical appraisal of your legal situation contact Tim Gray at timothy.gray@clough-willis.co.uk