Partnerships – Unwanted Risks

16 February, 2017

A partnership can be a very efficient and flexible business structure, but it can have unwanted consequences for the partners. Some of the key issues to consider are outlined below.

What is a partnership?

A partnership is a collection of individuals, who trade together with a view to making a profit. The ‘partnership’ is not a separate legal entity, although it is often given a trading name for ease of reference.  A partner cannot also be employed by the business (you cannot employ yourself), so it is important to carefully consider and document the status of any ‘salaried partners’ or senior ‘employees’. 

Is there a partnership agreement?

If you are in a partnership it is important that you have an up to date partnership agreement to document how the business should be run. In the absence of any agreement (which may be an oral agreement or implied by conduct) the terms set out in the Partnership Act 1890 will apply.

Liability of the partners

Unless the partners agree otherwise they all (individually) have the power to enter into a contract on behalf of the partnership. The partners are jointly liable for the debts of the business and there is no limitation on the extent of this liability.  If you wish to limit the liability of the partnership then you should insist on a carefully worded limitation clause in your business contracts.

Duties owed to the other partners

Each partner owes the other partners a duty to act honestly and in the best interests of the partnership. A partner should not benefit themselves at the expense of their co-partners and has a duty to account to them for any profits they receive out of the business.

Dissolution

Unless the other partners agree (e.g. in a partnership agreement) a partner cannot resign from the partnership. If one of the partners wishes to leave or dies then the partnership would need to be dissolved and the proceeds divided between the partners (or their estate).

Summary

A partnership can be an efficient way of running a business, but it is important to have a clear understanding of partnership law, so you can avoid any unwanted disputes.