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Understanding the Partnership Act in the UK: A Guide for Business Owners

If you are thinking about forming a partnership with one or more people to run a business in the UK, you need to be aware of the legal framework governing such relationships. The Partnership Act 1890 (PA) is the main statute that sets out the rules for partnerships in England, Wales, and Scotland, and it applies by default unless you agree otherwise in a written partnership agreement. This article will explain some key aspects of the PA that you should know before starting a partnership.

What is a partnership?

A partnership is a type of business structure where two or more people carry on a trade, profession, or other activity with a view to making a profit. Partnerships are generally easier and cheaper to set up and run than companies, as they do not require registration with Companies House or the appointment of directors or secretaries. However, partnerships do not have separate legal personality from their partners, meaning that the partners are jointly and severally liable for the debts and obligations of the partnership. This means that if the partnership owes money to a creditor, each partner is responsible for the full amount, even if one partner caused the debt.

What does the Partnership Act cover?

The PA covers various aspects of partnerships, including:

– Definition of a partnership: The PA defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”. This means that a partnership must involve both a common purpose (making a profit) and a joint effort (carrying on a business together).

– Formation of a partnership: The PA does not require any formalities for creating a partnership, such as a written agreement or registration. A partnership can be formed by oral agreement, conduct, or even by implication. However, it is advisable to have a written agreement that sets out the terms and conditions of the partnership, such as the capital contributions, profit sharing, decision-making, and termination. This agreement can override some of the default provisions of the PA.

– Rights and duties of partners: The PA defines the basic rights and duties of partners, which include sharing the profits and losses equally (unless otherwise agreed), contributing to the partnership capital, acting in good faith and with mutual respect, and not competing with the partnership or making secret profits. Partners also have the power to bind each other and the partnership to contracts and liabilities, unless they have expressly restricted each other`s authority.

– Termination of a partnership: The PA provides for several ways in which a partnership can be dissolved, such as by mutual agreement, death or bankruptcy of a partner, or court order. When a partnership ends, the partners are entitled to wind it up, settle the debts and assets, and distribute any remaining surplus.

Why have a partnership agreement?

Although the PA provides a default framework for partnerships, it may not suit every partnership`s needs or goals. By having a partnership agreement, you can customize the terms and conditions of the partnership to reflect your specific situation and preferences. For example, you may want to specify:

– How much capital each partner should contribute, and whether it can be increased or decreased;

– How profits and losses should be allocated among partners, and whether there should be any bonuses or draws;

– How decisions should be made, and whether there should be any quorum or voting requirements;

– How disputes should be resolved, and whether there should be any mediation or arbitration clauses;

– How the partnership should be dissolved, and whether there should be any non-compete or confidentiality clauses.

A partnership agreement can also help to clarify expectations, prevent misunderstandings, and avoid potential disputes in the future. It is advisable to seek legal advice when drafting or reviewing a partnership agreement, as there may be legal and tax implications that you need to consider.

Conclusion

The Partnership Act 1890 applies to most partnerships in the UK, but it is wise to have a written partnership agreement that reflects your specific needs and goals. By understanding the basic provisions of the PA and the benefits of a partnership agreement, you can start a successful partnership with confidence and clarity.