Partnership

Related Topics:
Partnerships :: Partnerships_and_Syndications :: Partnership_for_Peace :: Partnership_Programs

For the cricketing term please see partnership (cricket).

In the common law, 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 they have all invested.

There are two types of partners. General partners have an obligation of strict liability to third parties injured by the Partnership. General partners may have joint liability or joint and several liability depending upon circumstances. The liability of limited partners is limited to their investment in the partnership.

A silent partner, also known as a sleeping partner, is one who shares in the profits and losses of the business, but is uninvolved in its management, and/or whose association with the business is not publicly known.

In the civil law the 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 to 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.

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 criterion 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 unincorporated 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 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))

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 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).

External links

Understanding Partnerships – Advantages & Disadvantage – Must read, in-depth article.

Types of companies | Legal entities

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