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The bulk of the law regarding partnerships is contained in the
Partnership Act 1890, which defines a partnership as the ‘relationship
which subsists between persons carrying on a business in common
with a view of profit’.
The law does not prescribe that
any particular form is necessary to bring a partnership into
existence, but a partnership is usually created by a forma Deed
of Partnership. (it is appropriate at this point to note that
it is correct to refer to a partnership as a ‘firm’,
but this term should not be used in reference to a corporation.)
The agents of a partnership are in law all treated as one another’s
agents, and the firm as such may be sued, irrespective of which
partners were involved in the subject-matter of the litigation;
and this applies even where one or more partners have acted
without the authority of the partnership as a whole. Conversely,
if any partner in the course of the business has a right of
action, this right may be exercised for the benefit of the partnership
as a whole.
The fact that the Rules of the Supreme Court make it possible
for a firm to sue or to be sued as such does not, however, mean
that the firm has a legal personality of its own.
A peculiar feature of partnership is that the law requires that,
after the partnership has been formed, each individual partner
has the duty of utmost good faith in his dealings with the other
members of the partnership. Apart from negotiations leading
to the formation of insurance contracts, this is the only instance
where the law imposes so onerous a duty. In particular, the
duty requires that where a partner makes any profit in connection
with the business, it must be shared amongst all the partners
in accordance with the terms of the partnership agreement.
Generally, the liability of each partner for the debts of the
partnership is unlimited. Under the Limited Partnership Act
1907, however, it is possible to create a limited partnership.
Under such an arrangement, the liability of some, but not all,
of the partners may be limited to the amount of capital which
they subscribe. Thus, such partnerships include ‘limited
partners’ with limited liability and ‘general partners’
with unlimited liability. Limited partnerships are rare.
The number of people involved in a partnership must generally
not exceed twenty.
The death of a partner automatically dissolves the partnership,
and the surviving partners must account to his personal representatives
for the amount of his interest in the firm. This could put the
partnership in financial difficulties, and so it is common for
funds to be provided from the proceeds of a life policy on the
deceased partner’s life. If no arrangement such as this
is made, the business of the firm may be dislocated, or perhaps
even ended, and there is also the danger that the remaining
partners will be tempted to admit another partner simply because
he can provide the necessary finance, rather than because he
can take an active part in the running of the business.
Because of the existence of unlimited liability, and also because
the number of partners is restricted by law, there is a tendency
for partnerships to turn themselves into limited companies.
However, persons in certain professions must work either on
their own account or in partnership, and those in certain other
professions, although they may form limited companies, may prefer
to work as partnerships. The law therefore allows for partnerships
of more than twenty in a number of professions including solicitors,
chartered accountants, architects and chartered loss adjusters.
It is useful to draw comparisons between a partnership
and a company:
-A company is a legal entity distinct from its shareholders,
whereas a partnership has no corporate existence.
-What a company can do is limited by the scope of its objects
clause, whereas partners can by mutual agreement at any time
change the scope of their activities. It is important, however,
that there be mutual agreement; where, at any given time, an
individual partner purports on behalf of the firm to make a
contract in connection with an activity which is altogether
outside the scope of the activities of the firm, he alone will
be liable under it.
-In a company, the liability of a shareholder is limited to
the nominal value of his shareholding or the extent of his guarantee,
whereas, except in the case of a limited partner, the liability
of a partner is unlimited.
-The management of a company is in the hands of its board of
directors rather than its shareholders, whereas normally all
the members of a partnership play an active part in the running
of the business.
-The possible number of members of a company is not subject
to any legal restriction, whereas generally the maximum number
of members of a partnership is twenty.
-In the case of companies, particularly public companies, details
relating to their affairs, and particularly their accounts,
must be made public, but a partnership is allowed to operate
with very little publicity.
-By definition a partnership is formed with a view to engaging
in activities which it hopes will make a profit. Although most
companies aim to make profits, it is not essential that this
should be their aim.
-A partner may not introduce a new partner into the partnership
without the consent of the existing partners, but the shares,
and therefore the ownership, or a public limited company may
be freely bought and sold.
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