Partnerships — SQE1 FLK1 Business Law and Practice

A printer retires from his firm after 20 years. His partners put an advertisement in the London Gazette. Nobody writes to a single customer or supplier. In May a paper merchant that has supplied the firm for eleven years, and always negotiated its terms with him, delivers £40,000 of stock on credit. It knows nothing of the retirement.

Is he liable for the £40,000? Yes. He had gone, but this merchant had dealt with the firm for years and nobody told it he had left. That is Partnerships, the second topic in Business Law and Practice, and it is about three things. When you are in. What you owe the others while you are in. And how hard it is to get out. Keep the printer in mind.

Here is the route. What makes a partnership, and what does not. Then how one is formed, and the default terms the Act supplies. Then authority: when one partner can bind the rest. Then liability, coming in and going out. Then the duties partners owe each other. Then property and dissolution. And the two limited structures.

Start with the definition, and it is worth knowing word for word. Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. Section 1 of the Partnership Act 1890. Four elements. Persons, which includes companies. Carrying on a business, meaning any trade, occupation or profession. In common, a joint enterprise and not two separate businesses. And with a view of profit.

Try one. Two neighbours agree to grow vegetables together. They work the plot every weekend, run a joint account for seed and tools, and pay in equally. The whole crop is divided between the two households and eaten. A greengrocer has twice offered to buy the surplus and they have twice refused. Partnership? No. There is no view of profit, and without that element there is none, however business-like the rest of it looks.

Now the consequence that shapes everything. A general partnership has no separate legal personality. The firm is simply the aggregate of its partners. It cannot own property in its own name; the partners own as co-owners. It cannot sue or be sued in its own name, though court rules let you use the firm name for convenience. And the partners are personally liable for every partnership debt.

Which is why the profit element gets fought over. Sharing profits is prima facie evidence of partnership under s.2(3), but never conclusive. A share paid as an employee's wages does not make the employee a partner. Nor does one paid as repayment of a debt, or as an annuity. Ask what the payment is for, not whether it moves with the profits.

Formation takes nothing at all. No registration, no written agreement, no filing. A general partnership is not registrable at Companies House and never has been. It can arise from conduct alone, and two people can be partners without ever using the word.

A written agreement is not required, but without one the Act writes your terms for you. Section 24. Partners share profits and losses equally, whatever the capital each put in. No partner is entitled to remuneration for working in the business. Every partner may take part in management. Ordinary matters go by majority. A change in the nature of the business needs unanimity. And no new partner comes in without the consent of them all.

Now authority, and this is where the money is. Section 5. Every partner is an agent of the firm and of the other partners for the purpose of the partnership business. An act done in the usual way of business of the kind the firm carries on binds the firm and every partner. Two escapes, and both must be made out. The partner in fact had no authority, and the third party either knew that or did not believe him to be a partner.

So what counts as the usual way of business? In a trading partnership, one that buys and sells goods, a partner has implied authority to sell the firm's goods and buy goods for it. To receive payment, employ staff, give receipts and borrow money. In a non-trading partnership, a professional firm for instance, authority to borrow may not be implied at all.

Test it. Two partners run a building business. Their written agreement says neither may borrow for the firm, or commit it to anything over £50,000, without the other's written consent. One of them borrows £100,000 from the firm's bank without telling the other, signs in the firm's name and pays it into the firm's account. The bank knows he is a partner. It has never seen the agreement. Is the firm bound? Yes.

Section 8 is why. A restriction agreed between partners on a partner's power to bind the firm defeats a transaction only against someone with notice of it. Borrowing is within the usual way of business of a building firm. The bank knew he was a partner and knew of no cap, so the firm and both partners are bound. The cap gives the other partner a claim against the borrower. It does nothing against the bank.

Liability now, and there are two flavours. For the firm's debts and obligations, partners are jointly liable under s.9. For wrongs committed by a partner in the ordinary course of business, they are jointly and severally liable under ss.10 to 12. Either way a creditor can pursue any one partner for the whole amount.

Concretely. One partner drives a partnership van into a parked car, £25,000 of damage. The other was at the depot. The driver has no assets and the other partner owns a house. The car's owner may recover the whole £25,000 from the partner who was nowhere near it.

Coming in is easy. Under s.17(1) a person admitted into an existing firm is not liable to its creditors for anything done before they became a partner. Take a one-third share of the profits and assets and you still take none of the old debts, unless you agree to by novation with each creditor.

Getting out is the hard part, and it is where our printer comes back. A retiring partner stays liable for debts incurred while a partner, and only novation releases him. For future debts there is s.36. Anyone dealing with a firm after a change in its constitution may treat all the apparent members of the old firm as still members. Until he has notice of the change.

Notice splits two ways. For someone who dealt with the firm before the change, you need actual notice. A letter. For someone who never dealt with the firm, an advertisement in the London Gazette is enough. Our printer's partners advertised, and advertised only. The merchant of eleven years was never written to, so it could treat him as still a partner. He pays the £40,000.

Now the mirror image. A different retired partner, a cabinetmaker. His firm agreed to take his name off the notepaper and never did. He has never seen the notepaper since he left and nobody told him. A supplier that had never dealt with the firm read his name on a letterhead and supplied £30,000 of timber on the strength of it. Liable? No.

Section 14 is holding out. You are liable as a partner if you represent yourself as one, or knowingly allow yourself to be represented. Liable to somebody who then gives credit to the firm on the faith of it. The cabinetmaker did neither. The name on the letterhead is the representation. The knowledge and the acquiescence are what he lacked. Tower Cabinet Co Ltd v Ingram.

Two retired partners, two failures of paperwork, opposite results. The printer pays because his firm never told an old customer. The cabinetmaker walks because he never knew his name was still being used. Retirement is a checklist, not an event.

Partnership is a relationship of utmost good faith. Partners owe each other duties of loyalty, honesty and fair dealing that go well beyond an ordinary contract, and three sections carry it. Section 28: render true accounts and full information on everything affecting the partnership, to any partner.

Section 29. Every partner must account to the firm for any benefit derived without consent from any transaction concerning the partnership. Or from any use of the partnership property, name or business connection. A partner in a petrol station business took the sole agency for the area in his own name. He had to account for the profit, because the opportunity reached him as a partner and he used the firm's connection. Pathirana v Pathirana.

Section 30. Carry on a business of the same nature as the firm's, competing with it, without the consent of the other partners. You must account for and pay over all the profits you made in it. Hold on to that one. It comes back at the quick check.

One more place good faith bites, and it is a sharp one. Buying a partner out. A managing partner offered his passive sister £120,000 for her quarter share and called the business steady but tired. He said nothing about a retailer's written offer for the factory site that would have made her share worth at least £300,000. The sale was voidable and could be set aside. Law v Law.

Partnership property next. Property brought into the partnership stock, or acquired on account of the firm, belongs to the firm and must be applied exclusively for its purposes. Bring your own van in, have it valued and credit it to your capital account. Put it in the accounts, let the firm pay its insurance and servicing, and it is the firm's. You cannot ask for it back on dissolution.

Partners hold it as tenants in common, not joint tenants. Each has a proportionate share in the assets as a whole, and no right to any particular asset.

Dissolution. By agreement. Automatically, on the expiry of a fixed term, the completion of a single venture, or notice by any partner where there is no fixed term. Automatically too on the death or bankruptcy of a partner. Or by court order under s.35. The grounds include permanent incapacity, conduct prejudicial to the business, persistent breach, a business that can only be carried on at a loss, and just and equitable grounds.

One of those cannot be contracted out of. Section 34 dissolves a partnership in every case on an event which makes the business, or carrying it on in partnership, unlawful. Strike a solicitor off the roll and the firm dissolves at that moment, whatever the deed says about carrying on.

After dissolution, s.38 keeps each partner's authority alive only so far as is necessary to wind up the affairs and complete transactions begun but unfinished. Finishing an order taken before dissolution, yes. Collecting the book debts, yes. Taking a new £35,000 order to keep the workshop busy, no.

Then s.44 sets the order of payment. Outside creditors first. Then partners' advances, meaning loans as distinct from capital. Then capital. Then the surplus, in the profit-sharing ratio. A partner who lends his own firm money ranks ahead of capital, never ahead of its outside creditors.

Two structures add limited liability. First, the limited partnership, under the Limited Partnerships Act 1907. At least one general partner with unlimited liability, and at least one limited partner whose liability is capped at what they contributed as capital. It registers at Companies House. The limited partner cannot bind the firm and cannot take part in management.

The price of that cap is absolute. One limited partner stepped in for eight months when a general partner fell ill, negotiating and signing contracts. Both general partners asked her to. Is she liable in full for a debt from those months? Yes. Section 6 of the 1907 Act makes her liable as though she were a general partner, and neither their request nor the register saves her.

Second, the limited liability partnership, under the Limited Liability Partnerships Act 2000, and this one differs in kind. An LLP is a body corporate with legal personality separate from its members. It can own land and contract in its own name, and its members are not personally liable for its debts. It exists only from the moment the registrar registers the incorporation document. Not before.

So it registers at Companies House, its name must end with LLP or Limited Liability Partnership, and it files accounts. It needs at least two designated members, who carry the statutory duties including delivering those accounts. If it would otherwise have fewer than two, every member becomes one automatically.

Members are agents of the LLP, with the same exception as s.5. The LLP is not bound where the member in fact had no authority and the other side knew it. Members are not liable for the LLP's debts, though they answer for their own negligence. And an LLP is tax transparent, so profits are taxed on the members rather than on the body corporate.

A word on how SQE1 tests this. You will not be asked to recall a case name or a section number. You get a scenario, five answers, and one instruction. Pick the best. So learn the rules and the reasons. The names here are memory pegs, nothing more.

If you keep only three, keep these. Section 5, which makes every partner an agent who can bind the rest. Section 36, which keeps a retired partner liable to old customers until they are actually told. And Tower Cabinet Co Ltd v Ingram, where a name on old notepaper cost nothing, because he never knew it was there.

Four traps. One: a partnership can exist without anyone agreeing to one. Courts look at the substance. Profit sharing is prima facie evidence, but a share paid as wages, as repayment of a debt or as an annuity does not by itself make anyone a partner.

Two: internal restrictions are internal. Partners can limit one partner's authority among themselves all they like. It does not touch a third party who deals in good faith without notice of it. The firm is bound, and the remedy runs between the partners.

Three: the retirement checklist. Check the agreement allows retirement. Write to every existing creditor, or you stay liable for future debts under s.36. Advertise in the Gazette for those who never dealt with the firm. And seek novation from the big ones.

Four: land held by a partnership. It is treated as personal property for partnership purposes under s.22, even though it is technically real property. So on a partner's death it passes with the partnership share, not as real estate to the heirs.

Quick check, and you have met this rule. Two partners run a graphic design business. There is no written agreement. Without telling the other, one of them sets up on her own account doing the same work for the same kind of customer. She works only at weekends, on her own computer at home, and none of her customers has ever been the firm's. Over six months she makes £15,000.

Must she account to the firm for all of it? Three answers. One: no, because she used none of the firm's equipment. Two: yes, but only for profit made from customers of the firm. Three: yes, because she competed with the firm without the other partner's consent. Pause here if you want a moment.

The answer is three. Section 30. Carry on a business of the same nature as the firm's, competing with it, without the consent of the other partners. You must account for and pay over to the firm all the profits made in it. The venture is of the same nature and there was no consent, so the whole £15,000 goes to the firm.

Why the other two fail. Option one imports a condition the section does not have: s.30 is not confined to cases where partnership property is used, which is the separate duty in s.29. Option two halves the remedy: s.30 captures all the profits of the competing business, not only those from the firm's customers.

Five things to take away. One: a general partnership needs no formality and no separate legal personality, so the partners' houses and savings answer for its debts. Two: every partner is an agent, and an act in the usual way of the firm's business binds them all.

Three: coming in carries none of the old debts. Going out carries the old ones and, without actual notice to old customers, the new ones too. Four: account for benefits taken through the firm's connection, and for every penny of a competing business.

Five: the two limited structures differ. A limited partnership is still a partnership, and the limited partner loses the cap the moment she manages. An LLP is a body corporate, taxed on its members. Our printer still owes £40,000, because nobody posted a letter. Next time, Company Formation and Constitution.

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