Traditional Partnerships

Definition of Partnership

• A partnership is a relationship between persons carrying on a business in common with a view to making a profit.

Characteristics of Partnerships

• A partnership is not a legal entity separate from the partners themselves.
• A company can be a partner in a traditional partnership.
• The Partnership Act 1890 does not require any formality for the establishment of a traditional partnership.
• A partnership can arise without any intention on the part of the parties to be or form a partnership.

Limited Liability Partnerships

• Limited liability partnerships are referred to as LLPs.

Formation of Partnerships

• At least two persons are required to form a partnership according to the Partnership Act 1890.
• The Partnership Act 1890 governs partnerships in the UK.

Advantages and Disadvantages

• A potential reason why clients ask for help to avoid creating a partnership is to avoid joint liability.
• A key advantage of partnerships over companies is that they are not required to file annual accounts or make annual returns.

Liability of Partners

• Partners have unlimited liability for contractual debts and obligations of the firm.
• Partners have unlimited liability in tort.
• A former partner can become liable for partnership debts incurred after they have left if they failed to give notice to the other partners or to the public.
• The overriding duty of partners to one another in a partnership is to act with good faith and utmost honesty.

Liability of Non-Partners

• A non-partner may be personally liable on a partnership debt if they have held themselves out as a partner.
• The state of mind of the person dealing with the non-partner is relevant for their liability on a partnership debt under section 14 of the Partnership Act 1890.

Authority of Partners

• The law of agency applies to determine if a partnership is bound by a contract made by an individual acting on its behalf.
• A partner can bind the firm against the wishes of other partners if they have actual or apparent authority.
• A partner's unauthorised act will bind the firm if the other party had no reason to believe that the partner had no authority.
• The purpose of section 5 of the Partnership Act 1890 is to protect third parties who deal with a partner in good faith.

Taxation of Partnerships

• Partnerships are transparent for tax purposes, meaning that the partners are taxed individually on their share of profits.
• The liability of partners in a partnership for the tax on other partners' shares of partnership profits is joint and several.

Miscellaneous

• The basis for determining a partner's fractional share of a capital asset in a partnership is the terms of the partnership agreement.
• Conducting business through a partnership has no significance in terms of confidentiality.
• One of the key features of partnerships is that there is no requirement for a written partnership agreement.
• Partnerships are treated as transparent for tax purposes, meaning that the partners are taxed individually on their share of profits.