Partnership Act 1890
What is a Partnership
A partnership is a business organisation where partners (minimum of two) will usually share decision making and divide the profits and losses of the business between themselves. Any type of business can be formed as a partnership and the Partnership Act 1890 is the legislation which governs the rights and duties of the individuals who are in business together.
There are a few advantages for forming a business in the form of a partnership including the lack of formality, no publically available accounts, fewer rules and the fact that partners are treated as self employed for tax purposes.
The Relationship between a Partnership and the Partnership Act 1890
The formation of a partnership is relatively simple and does not require any formalities. According to the Partnership Act 1890 a partnership automatically comes into existence when persons are “carrying on a business in common with a view of profit”.
Partnerships are usually regulated by contractual agreements between the partners, although this is not compulsory. What the Partnership Act 1890 seeks to do is to compensate for the lack of a Partnership Agreement (known as a Partnership at Will) or fill in any gaps in a Partnership Agreement by implying certain terms. The Partnership Act 1890 is split up into the following sections:
- The nature of the partnership
- The relationship the partners to the persons they deal with
- The relationship of the partners to one another
- The dissolution or termination of the partnership
Ultimately, the purpose of the Partnership Act 1890 is to treat all partners fairly and equally because a partnership is a relationship which requires utmost good faith. This is a duty which applies throughout the life of the partnership until a partner’s retirement; although it is worth noting that a retired partner continues to be liable for any breaches of duty whilst they were a partner.
The Drawbacks of the Partnership Act 1890
The Partnership Act 1890 is a very old piece of legislation and does not offer solutions to all the modern day problems that a partnership may face. Some disadvantages of the Partnership Act 1890 are as follows:
- A partner is not required to do anything towards the running of the business and therefore does not have to turn up to work.
- All partners share profits equally no matter how much time or capital they put into the business.
- A partner cannot retire or be expelled. If a partner dies or decided to leave, he can do so by giving notice to all the other partners. The partnership then has to be dissolved, the assets divided and a new partnership has to be created, a very impractical procedure.
- All partners are jointly and severally liable for the liabilities incurred by the business. If a debt cannot be paid then a creditor can pursue all the partners individually.
- Should a partner get into financial difficulty a creditor can take assets from the partnership to settle the debt.
- All partners are considered agents of the business and therefore act on behalf of and bind all the partners.
- All partners have an equal say in the running of the business.
- It does not contain any provisions for preventing an outgoing partner from going to work for a competitor and poaching customers, clients or employees.
The partners themselves are free to exclude any of the terms of the Partnership Act 1890 in their Partnership Agreement, provided they all agree, although they continue to have a duty to act in the utmost good faith.
It is recommended that a full Partnership Agreement is drawn up to govern the relationship between the partners and avoid potential disputes by relying solely upon the Partnership Act 1890.