In practice, you will sometimes find that clients ask for your help to avoid creating a partnership, rather than asking you to create one for them. One reason for this is that the legislation governing partnerships is over 100 years old and the default provisions, which will be implied by that legislation, are often unsuited to the modern business environment. Additionally, clients may have concerns about being subject to unlimited liability.
Nevertheless, there are some advantages. For example, it costs nothing to create a partnership, because no formality is required to create one. In fact, there are almost as many partnerships in the UK as there are companies and many of them are professional partnerships such as lawyers, accountants, surveyors and architects. Many businesses start as partnerships before they convert to a limited company.
The Partnership Act 1890 (PA 1890)
The PA 1890 provides the framework for regulating traditional partnerships. However, there is case law to supplement the PA 1890, and I will cover a small number of cases in later posts.
Whilst the PA 1890 and case law provide a framework for governing traditional partnerships, they are really ‘fall-back’ provisions in the absence of a partnership agreement or where the agreement is silent on any matter. Most traditional partnerships will have a formal written partnership agreement.
Existence of partnerships
As mentioned previously, a partnership is a relationship between persons carrying on a business in common with a view of profit (s.1(1) PA 1890).
Section 2 PA 1890 contains a list of rules for determining the existence of a partnership. The purpose of s.2 is to provide more detailed guidance in determining if the criteria in s.1(1) have been met. For example, evidence of profit sharing will be prima facie evidence of a partnership but not necessarily conclusive evidence (s.2(3) PA 1890). Case law provides that if there is an agreement to share losses as well as profits this makes the existence of a partnership more likely (Northern Sales (1963) Limited v Ministry of National Revenue (1973)). A loan of money by one party to another does not create a partnership.
Case law has also held that if the person is not being “held out” as a partner this makes the existence of a partnership less likely. In Walker v Hirsch (1884) a clerk lent money to the partnership, was paid a fixed salary and took 1/8th of the profits and of the losses but was never held out as a partner. No partnership was found to exist.