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Companies law
Basic forms:
Sole proprietorship
Partnership (General · Limited · LLP)
Corporation
Cooperative
United States:
Business trust · LLC · LLLP Series LLC Delaware corporation Nevada corporation
United Kingdom / Commonwealth / Ireland:
Limited company (By shares · By guarantee) (Public · Proprietary)
Civil law countries:
AB · AG · ANS · A/S · AS
K.K. · N.V. · OY · S.A. · GmbH
European Company Statute
Doctrines
Corporate governance
Limited liability · Ultra vires
Business judgment rule
Internal affairs doctrine
De facto corporation and corporation by estoppel
Piercing the corporate veil
Rochdale Principles
Related areas of law
Contract · Civil procedure

A partnership is a type of business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested.

In most countries, a partnership is a nominate contract between individuals who, in a spirit of cooperation, agree to carry on an enterprise; contribute to it by combining property, knowledge or activities; and share its profit. Partners may have a partnership agreement, or declaration of partnership and in some jurisdictions such agreements may be registered and available for public inspection. In many countries, a partnership is also considered to be a legal entity, although different legal systems reach different conclusions on this point.

Partnerships are often favored over corporations for taxation purposes, as a partnership structure eliminates the dividend tax levied upon profits realized by the owners of a corporation.

The most basic form of partnership is a general partnership, in which all partners manage the business and are personally liable for its debts. Two other forms which have developed in most countries are the limited partnership (LP), in which certain "limited partners" relinquish their ability to manage the business in exchange for limited liability for the partnership's debts, and the limited liability partnership (LLP), in which all partners have some degree of limited liability.

Australian partnerships under the Partnership Act 1958 (Vic)

Formation of a partnership

Summarising s. 5 of the Partnership Act 1958 (Vic) (hereinafter the 'Act'), for a partnership to exist, four main criteria must be satisfied. They are:

• Valid Agreement between the parties;
• To carry on a business - this is defined in s.3 as 'any trade, occupation or profession';
• In Common - meaning there must be some mutuality of rights, interests and obligations;
• View to Profit - thus charitable organizations cannot be partnerships (charities are typically incorporated associations under Associations Incorporations Act 1981 (Vic))

Who is a partner?

As to whether any given person involved with a company is a 'partner', guidance is found in s.6 of the Act. Several rules are given. The most common are as follows:

• Joint-ownership:

Rule 1 - s.6(1)provides that there must be joint-ownership. This is rather self-explanatory but it should be noted that the mere fact that persons may be joint-tenants or have part ownership do not in themselves create a partnership. Typically, where the rules below point towards a partnership, such would generally satisfy this rule.

• Participating in gross returns:

Generally speaking, 'partners' must share gross-returns each according to their share in the business. Thus at first instance, if persons share the gross-returns, one would be inclined to say that a partnership exists. However, rule 2- s.6(2) complicates this. It provides that the sharing of gross returns will not in itself create a partnership.

All this notwithstanding, sharing of gross-returns is a strong indication of a partnership - particularly where a set percentage is prescribed in the agreement.

• Sharing of profits:

Rule 3- s 6(3) provides that the sharing of profits is prima facie evidence that a partnership exists. However, this is not categorical. To cite two examples where a person entitled to a share was not a partner is where that such person is a creditor or by virtue of s.6(3)(b) where that 'sharing of profits' is simply remuneration or a wage. Note in the latter example, s.28(6) provides that although partners are not entitled to remuneration - and thus he who receives remuneration is prima facie not a partner - this may be varied by partnership agreement. Therefore, receiving remuneration does not conclusively indicated against a partnership.

• Sharing of losses:

Rule 3 – s6(3) also concerns sharing of profits. Section 28 explains that all partners must contribute equally to firm’s losses.

• Exercise partner’s rights:

Generally, where a person exercises those rights that would typically be exercised by a true partner, the more likely a partnership can be imputed. Section 28 includes a non-exhaustive list of partner’s rights.

The most common partners rights are the right to participate in the firms management (s.28(5)) (which can be illustrated by attending meetings) and the right to access the firm's books and confidential financial reports (s.28(9)). A partner without the right to participate in the firms management is often referred to as a silent partner.

But, at the end of the day there is flexibility in the partnership agreement and it is possible for the partners to consensually agree to exclude one or more of these partner's rights in relation to any given partner. Thus, put simply, the mere fact a person does not exercise these rights does not indicate categorically that they are not a partner.

Partner's liability

Perhaps the most important question for any partner is 'what is my liability under this arrangement'.

In essence, the liability of a partner (or even a non-partner who was 'held out' to be a partner see below) is significantly large. Every partner or person held out to be a partner is both an agent and principal of the firm and may thus bind the firm and the partners: s.9. Simply, each partner is his brother's proverbial keeper and will be responsible both legally and financially for the actions of the other partners in the general course of business.

To give a clear example, where one partner acts negligently and there is no indemnity insurance (or the indemnity insurer refuses to cover the loss), the liability of all partners will be joint and several: s.16. The cause of major distress for partners arises where the other partners become insolvent. The weight of total liability would rest on the solvent partners. Thus put simply, even if a person only had a 25% partner's share, he or she would be responsible for covering all 100% (potentially exorbitantly exceeding their investment) of the damage arising from the negligence if the other partners do not have the means to pay.

As alluded to above, the issue of "holding out", which is discussed in s.18(1) of the Act, is particularly relevant. "Holding out" refers to where a non-partner advertises himself or alternatively is advertised to the world as being a partner. This advertising can be either explicit and/or implicit

For example, where the firm permits a non-partner to 'sign off' on company accounts or documents or where a non-partner has an office next to the partner's or even enjoys the perks of the true partners, these are implicit indication to the world that the non-partner is actually a partner. To exemplify express indications, this would occur where a non-partner has his name on the company letter-head or to go even further, actively introduces himself as a partner.

Not only may the non-partner be held to be liable as a partner, the true partners will also be liable for the non-partners actions just as they would be for the actions of a true partner. This is provided that the relevant third-party was reasonably unaware of the non-partner's true position in the business and the conduct on the non-partner could be described as in the ordinary course of business. These two are generally part and parcel as if the transaction is not in the ordinary course of business, then the less likely it is that a third party would genuinely believe that the non-partner was a partner.

Limited partnership

Limited Partnerships are governed by Part III of the Act. The paramount characteristic of such a partnership is that a limited partner's liability will be limited: See s.49(1) definition.

Section 60(1) indicates that the liability of limited partner limited to amount shown in Register (Register of Limited Partnerships, see s. 57). Typically, a limited partner would make a contribution to the capital or assets of the partnership. An interpretation of s.60(2) suggests that the limited partner's liability would not exceed the contribution made or promised.

Other key points to note are that:

• A limited partner can not take part in the management of the business of the limited partnership: s.67(1). If he or she does so, they will be liable as general partners by virtue of s.67(2).

United Kingdom limited partnership formation

A limited partnership consists of:

• one or more persons called general partners, who are liable for all debts and obligations of the firm; and
• one or more persons called limited partners, who contribute a sum/sums of money as capital, or property valued at a stated amount. Limited partners are not liable for the debts and obligations of the firm beyond the amount contributed.

Limited partners may not:

• draw out or receive back any part of their contributions to the partnership during its lifetime; or
• take part in the management of the business or have power to bind the firm.

If they do, they become liable for all the debts and obligations of the firm up to the amount drawn out or received back or incurred while taking part in the management, as the case may be.

Generally speaking, an individual or a legal body such as a company may be a partner in a limited partnership, either as a general or as a limited partner. A person cannot be both a general and a limited partner at the same time.

Registration process

A limited partnership must be registered under the Limited Partnership Act 1907. To register, you must deliver a statement (Form LP5), signed by all the partners, to the Registrar. Partnerships whose principal place of business is situated [or proposed to] be situated in England and Wales should send their forms to the Cardiff office; those whose principal place of business is situated or proposed to be situated in Scotland to the Edinburgh office; and those whose principal place of business is situated or proposed to be situated in Northern Ireland to the Belfast office.

The information supplied on the form must include the following:

1. the firm's name;
2. the general nature of the business;
3. the address of the principal place of business;
4. the full name of each partner, listing general and limited partners separately;
5. the term (if any) for which the partnership is entered into;
6. the date of its commencement;
7. a statement that the partnership is limited and the description of every partner as such; and
8. the sum contributed by each limited partner, and whether it is paid in cash or otherwise.

If all these particulars are in order, the Registrar will issue a certificate of registration, subject to the acceptability of the name. The Registrar will advise against the use of any name which is the 'same as' the name of a limited company, other legal body, or another limited partnership already on the register. In addition, the names of limited partnerships are controlled by the Business Names Act 1985 (see http://companieshouseonline.com/content/view/46/54/1/1/ Choosing the Name).

The general partners are responsible for the delivery of Forms LP5 and LP6 whether or not the preparation of the documents was delegated to accountants or to anyone else.

The Limited Partnership Act 1907 provides for the imposition of penalties for various defaults in carrying out the requirements of the Acts and for failing to send to the Registrar the required forms.

Notice of any arrangement or transaction under which a general partner will become a limited partner in the firm must be advertised in the London, Edinburgh or Belfast Gazette, as the case may be. Notice must also be advertised in the Gazette of any arrangement or transaction under which a limited partner's share in the firm will be assigned to somebody else. Until this is done these arrangements or transactions have no effect.

Limit on the number of partners

A limited partnership may not normally consist of more than 20 persons. However, under section 717 of the Companies Act 1985 there are a number of exceptions to this rule, including:

• a partnership carrying on practice as solicitors and consisting of persons each of whom is a solicitor;
• a partnership carrying on practice as accountants where the partnership is eligible for appointment as a company auditor;
• a partnership carrying on business as members of a recognised stock exchange and consisting of persons each of whom is a member of that exchange;
• a partnership carrying on business as surveyors, auctioneers, valuers, estate agents, land agents, or estate managers and consisting of persons of whom at least three-quarters are members of the Royal Institute of Chartered Surveyors or the Incorporated Society of Valuers and Auctioneers and of whom not more than one-quarter are limited partners;
• a partnership carrying on business as insurance brokers and consisting of persons each of whom is a registered insurance broker or an enrolled body corporate. (For the meaning of 'registered insurance broker' and 'enrolled body corporate' see section 29(1) of the Insurance Brokers (Registration) Act 1977.);and
• a partnership which is a collective investment scheme the operator of which, or the manager of the investments of which, is an authorised person under Part IV of the Financial Services and Markets Act 2000 or a European Economic Area firm or a Treaty firm with permission under the Act to operate the scheme or manage the investments.