General partnerships

The Partnership Act 1890 (the Act) sets out the legal framework that applies to general partnerships.

A partnership under the Act is described as the relation that subsists between persons (which includes individuals or corporate entities) carrying on a business (which includes every trade, occupation and profession) in common with a view of profit.

Nature of a general partnership and its legal framework

The Act does not provide a complete code of partnership law and expressly preserves the rules of equity and common law applicable to partnerships.

As a partnership is not a separate legal entity from its partners it cannot acquire rights, incur obligations or hold property in its own right. It is therefore important to distinguish between partnership property and property that personally belongs to an individual partner.

Each partner is an agent of the partnership and his other partners for the purposes of the partnership's business and can bind the partnership, and the other partners, by any action he takes in the ordinary course of business.

Each partner owes a duty of good faith to his fellow partners in all partnership dealings and the relationship between partners is of a fiduciary nature.

A partner is jointly liable with the other partners for all the debts and obligations that the partnership incurs which he is a partner. Such personal liabilities of a partner are potentially unlimited and this is often an important factor to be considered when deciding on whether to use a partnership as a business vehicle.

Forming a general partnership and continuing obligations

In order to form a partnership, it is not necessary to file any documents, register any information or complete any formalities. Two people may form a partnership by simply starting to carry on a business together and sharing the profits, subject to fulfilling the criteria of the definition of a partnership in the Act. Whether or not the criteria have been met is a question of fact.

When a partnership is being formed, the partners must comply with the rules relating to business names in the Companies Act 2006.

A partnership that carries on business in the United Kingdom under a business name is also required to make certain trading disclosures in its business documents and at its business premises.

General partnership agreements

The Act sets out default provisions which shall apply to a partnership in the absence of an agreement to the contrary. Such default provisions include:

• partners are entitled to share equally in the capital and profits of the firm

• partners will be jointly liable to contribute equally to any losses of the firm

• every partner can take part in the management

• the consent of all the partners is needed to admit new partners

• a partnership, for no fixed period, can be determined on giving notice to all the other partners, and

• a partner is not entitled to be paid for acting in the business

The default provisions may not suit the manner in which partners wish to run their business, in which case they can exclude of modify such provisions by entering into a partnership agreement. A partnership agreement is a private document, and will usually contain provisions relating to:

• profit sharing

• duration

• termination, and

• the exit and expulsion of partners

• how losses are to be divided between the partners