partnership

The Partnership Act 1890 defines a partnership as the relationship that subsists between two legal entities carrying on a business in common with a view to profit. Accordingly, for a one to exist, a business must exist, which is carried on by two or more legal persons for profit. There is no single feature of a relationship of itself which will necessarily mean that a relationship constitutes a partnership.

If a partnership does subsist between parties, there is no requirement that the parties have expressly agreed (in writing or orally) that they will be a partnership – the status of the relationship is imposed by operation of law.

Rights and Liabilities in a Partnership

The status of a partnership gives significant rights to third parties dealing with partnerships, such as joint liability of all the partners for wrongs done in the course of the business to third parties.

Partnerships are not separate legal entities to its participants. Each partner carries on business as a principal of the business, and as the agent for each of the other partners. As such each partner has the capacity to bind each of the partners in all matters within his authority. Each partner is jointly liable with every other partner for all the debts and other obligations of the firm. Also, the partners own the business, and have a beneficial interest in the form of an undivided share in partnership assets (including any profits of the business).

Business

The business carried on may be a trade, occupation and profession according to s 45 of the Partnership Act. The requirement that a business is being carried on by the persons said to be partners will include any commercial trading activity. There may be a requirement to demonstrate that the business has an element of continuity or repetition, but a single, isolated joint venture may satisfy the test; the business may be a set of unrelated and diverse trading activities, equally it may be a single focussed business activity.

A partnership may be held to subsist before trading activity has commenced, where persons have acquired assets and performed other preparatory tasks to commence trading activity. The question is whether the parties have done enough to have commenced a joint enterprise which they have agreed to engage. It may be adequate that the parties commenced seeking customers and trade, and have the capacity to perform the work sought.

The members of firms may be companies or an unincorporated associations as well as a natural persons.

Whether or not a particular business trades as a partnership is a question of fact to be determined by the factual matrix of the particular case, having regard for a number of rules set out in the Act.

The rules include:

1. Joint ownership of property of itself does not create a partnership
2. Sharing of gross returns does not create a partnership
3. Receipt of a part of the gross profits of the business contributes to the assertion that the business operates as a partnership, but is not determinative that there is one. Where payment of a share of profits is contingent on the profits of an event does not necessarily make the person a partner of the business.
4. Simply because a person receives sums from the profits of a business does not render them a partner.
5. A person advancing money to a person engaged in a business and interest charged is made to vary with the profits of the business.

In common

The Act requires that the business in question is carried on “in common”. Such a business is run with a view to a common benefit whereby the participants have accepted expressly, impliedly or by conduct that they have accepted a degree of mutual rights and obligations between them.

With a View to Profit

Profit is a reference to the sum remaining after expenses have been paid by a business, as opposed to sharing of revenues, which would be a distribution of gross returns of the business. The essence of the requirement is that the gain derived from the business will be shared to some extent by the persons involved in the alleged partnership. The profit must be for the common benefit of the participants, and not for their own individual profitability.

Sharing of Profits

Partnerships are commonly associated with a division of profits between its participants; the sharing of profits is not a requirement specified by the Partnership Act, nor was it a requirement under the common law prior to the commencement of the Act. It is merely an incident of partnerships and not a fundamental perquisite to their formation.

Separate Legal Entities

Partnerships should be distinguished from Limited Liability Partnerships, which are incorporated legal entities which are hybrid entities with features in common with companies, and with traditional partnerships (which are described above in detail). Companies and limited liability partnerships are artificial legal entities created by special authority (see company; limited liability partnership). The shareholders of a company do not carry the liabilities of the company, unless very special circumstances exist (such as insolvent trading or fraud). Thus the shareholders are not liable for the wrongs of a company.

In a partnership, the partners are not separate to the legal entity: the partners are the legal entity. Accordingly, they are liable for their own wrongs in their capacity as partners of the business, as well as those of the other partners. Such rights are enforceable against them individually.