Learning Outcomes
After reading this article, you should be able to:
- Identify the characteristics of an ordinary partnership based on the Partnership Act 1890.
- Recognise the implications of an ordinary partnership being an unincorporated entity without separate legal personality.
- Outline the key default provisions of the Partnership Act 1890 concerning partner relations and the importance of a partnership agreement.
- Explain the principles of partner liability, including joint and several liability and liability for outgoing partners.
- Describe the fiduciary duties owed between partners.
SQE1 Syllabus
For SQE1, you are required to understand the characteristics of the different business options, and advise on which may be most suitable in particular circumstances. This article addresses the following points from the SQE1 syllabus:
- Business and organisational characteristics (partnership)
- Legal personality and limited liability
- Procedures and documentation required to form a partnership
- Partnership decision-making and authority of partners:
- Procedures and authority under the Partnership Act 1890
- Common provisions in partnership agreements
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Is a written agreement legally required to form an ordinary partnership?
- What is the term used to describe the liability of partners for the firm's debts?
- Can a partner be expelled from the firm by a majority vote if there is no partnership agreement?
- Does an ordinary partnership have a separate legal personality?
Introduction
An ordinary partnership is formed when two or more persons carry on a business together with the intention of making a profit. This is the definition provided by the Partnership Act 1890 (PA 1890), the primary legislation governing these structures.
Key Term: Partnership A relationship between persons carrying on a business in common with a view of profit (s 1(1) PA 1890). It is an unincorporated business structure.
The existence of a partnership is a matter of fact. It does not require formal registration with Companies House or even a written agreement. If individuals act in a way that meets the statutory definition, a partnership may be implied by law. Sharing profits is strong evidence of a partnership, although not conclusive (s 2(3) PA 1890).
Formation and Structure
Informal Formation
Unlike companies or LLPs, ordinary partnerships can be created informally through oral agreement or simply by conduct. This simplicity makes it an accessible structure for starting a business quickly.
Unincorporated Status
A significant feature is that an ordinary partnership is unincorporated. It does not possess a separate legal personality distinct from the partners themselves. This means:
- The partnership cannot own property in its own name; assets are owned by the partners.
- Contracts are entered into by the partners.
- Legal actions involve the partners personally, not the firm as a separate entity.
Partnership Agreements
While not legally mandatory, a formal written agreement is highly advisable.
Key Term: Partnership Agreement A formal document setting out the terms of a partnership. It usually deals with the relationship between the partners and their relationships with third parties.
In the absence of an agreement, the default provisions of the PA 1890 apply. These default rules cover profit/loss sharing (equal shares, s 24(1)), management rights (all partners may participate, s 24(5)), entitlement to remuneration (none, s 24(6)), introduction of new partners (requires unanimous consent, s 24(7)), and expulsion (not possible by majority, s 25). These default positions are often unsuitable for modern business arrangements, making a bespoke agreement important.
Partner Liability
Unlimited Personal Liability
Partners in an ordinary partnership face unlimited personal liability for the debts and obligations of the firm. There is no legal distinction between the business assets and the partners' personal assets.
Key Term: Joint and Several Liability Creditors can sue all partners together (jointly) or any individual partner (severally) for the full amount of a partnership debt (s 9 PA 1890). Partners are also jointly and severally liable for wrongful acts committed by a partner in the ordinary course of business (ss 10-12 PA 1890).
This personal exposure is a major disadvantage compared to limited companies or LLPs.
Liability of Incoming and Outgoing Partners
- Incoming partners: Are not automatically liable for debts incurred before they joined (s 17(1) PA 1890).
- Outgoing partners: Remain liable for debts incurred while they were partners (s 17(2) PA 1890). They can also be liable for debts incurred after they leave unless they give proper notice (s 36 PA 1890).
Notice Requirements for Retiring Partners
To avoid liability for future debts, a retiring partner must give:
- Actual notice to those who have dealt with the firm before their retirement.
- Constructive notice (an advertisement in the London Gazette) to potential future creditors who have not dealt with the firm previously (s 36 PA 1890).
Holding Out
A person who is not a partner (or has retired) can still be liable for partnership debts if they represent themselves, or knowingly allow themselves to be represented, as a partner, and a third party gives credit to the firm based on that representation (s 14 PA 1890).
Key Term: Holding Out Creating the appearance that someone is a partner when they are not, leading to potential liability if third parties rely on this representation to their detriment.
Duties Between Partners
Partners are in a relationship requiring mutual trust and confidence.
Key Term: Fiduciary Duty A duty of loyalty and good faith owed by partners to each other and the firm.
Key statutory duties under the PA 1890 include:
- Duty to render true accounts and full information (s 28).
- Duty to account for any benefit derived without consent from any transaction concerning the partnership or use of partnership property, name, or business connection (s 29).
- Duty not to compete with the firm without consent (s 30).
Partnership agreements often include more specific duties, such as requirements for full-time commitment to the business.
Termination of the Partnership
Dissolution
A partnership can be dissolved (brought to an end) in several ways:
- By expiry of a fixed term or completion of a single venture, if agreed (s 32 PA 1890).
- By notice, if it is a 'partnership at will' (i.e., no fixed term agreed). Any partner can give notice at any time, dissolving the partnership immediately unless the notice specifies a later date (ss 26(1), 32(c) PA 1890).
- By the death or bankruptcy of a partner (s 33 PA 1890), unless agreed otherwise.
- By subsequent illegality making the business unlawful (s 34 PA 1890).
- By court order in specific circumstances, e.g., permanent incapacity of a partner, conduct prejudicial to the business, persistent breaches of the agreement, business operating only at a loss, or on 'just and equitable' grounds (s 35 PA 1890).
Key Term: Dissolution The process by which a partnership formally ends, leading to the winding up of its affairs and distribution of assets.
Partnership agreements typically include provisions to allow the partnership to continue despite the exit of a partner, detailing procedures for valuation and payment of the outgoing partner's share to avoid automatic dissolution under the PA 1890 default rules.
Distribution of Assets on Dissolution
Upon dissolution, partnership assets are used first to pay external debts, then advances made by partners, then partners' capital contributions. Any remaining surplus is distributed according to the profit-sharing agreement (or equally if no agreement exists) (s 44 PA 1890). If assets are insufficient, partners contribute to losses in their profit-sharing proportions.
Worked Example 6.1
Anna, Ben, and Chloe run a graphic design business as an ordinary partnership with no written agreement. The firm owes £15,000 to a supplier. The partnership assets total £6,000. Anna has personal savings of £20,000, Ben has £5,000, and Chloe has no personal savings. How can the supplier recover the debt?
Answer: The supplier can claim the £6,000 from the partnership assets. For the remaining £9,000, the supplier can sue Anna, Ben, and Chloe jointly or severally. Given their personal assets, the supplier is most likely to pursue Anna for the full £9,000. Anna would then have a right to claim contributions from Ben (£3,000) and Chloe (£3,000) based on their equal share of liability under the PA 1890 default rules, although Chloe's lack of assets might make recovery difficult.
Revision Tip
The lack of separate legal personality and the existence of joint and several liability are fundamental characteristics distinguishing ordinary partnerships from companies and LLPs. Ensure you understand the practical implications of these features for partners.
Key Point Checklist
This article has covered the following key knowledge points:
- An ordinary partnership arises when two or more persons carry on business in common with a view of profit (s 1(1) PA 1890).
- No registration or written agreement is legally required for formation, but a partnership agreement is highly recommended to vary unsuitable default PA 1890 provisions.
- Ordinary partnerships lack separate legal personality; partners own assets and liabilities directly.
- Partners have unlimited personal liability for partnership debts, which is joint and several.
- Partners owe fiduciary duties to each other, including duties of good faith, disclosure, and accounting for profits.
- Retiring partners remain liable for existing debts and can be liable for future debts if proper notice is not given (s 36 PA 1890).
- Partnerships can be dissolved by agreement, notice (if at will), death/bankruptcy of a partner, illegality, or court order.
Key Terms and Concepts
- Partnership
- Partnership Agreement
- Joint and Several Liability
- Fiduciary Duty
- Holding Out
- Dissolution
