The legislation

The Partnership Act 1890 which has basically remained unchanged to the present day sets out the structure of current partnership law. The Limited Partnerships Act 1907 subsequently allowed the liability of some partners to be limited, whilst general partners continued to have unlimited liability.

This legal arena provides a great deal of work for business litigation solicitors who are frequently involved in resolving disputes between those trading unincorporated who had no idea of the existence of these Acts of parliament and the effects they would have on their business relationships with each other.

Partnership defined

It is defined in the 1980 Act as "the relation which subsists between persons carrying on a business in common with a view to profit", however limited companies which are governed by separate legislation are excluded from the provisions of the Act. It is possible for companies which are, in law, separate legal entities to form partnerships either between themselves or with an individual.

In writing?

In the absence of a formal written agreement or where any written agreement is lacking in relevant content, in the event of disputes, recourse is made by business litigation solicitors and the courts to the partnership law outlined in the 1890 Act. It is always up to those who allege the existence of a partnership, in the absence of a written agreement, to prove the actual existence of such a legal relationship prior to the court determining the issues in dispute.

Excluded businesses

Partnership law defines that the relationship exists when at least two parties enter into agreement, which is not necessarily in writing, and may be implied, to carry on business together with the intention of making a profit. This definition effectively excludes most charities and members clubs from the 1890 Act as neither usually have the intention to make a profit.

Partnership or limited company

It is probably correct to say that most people and other businesses feel safer when dealing with a limited company which appears to give some sort of respectability and the impression of organisation however business litigation solicitors will usually advise that the opposite is true because partners have unlimited liability whereas the directors of limited companies have limited liability.

Whilst a limited company does provide protection for the directors in the event of a financial collapse there are more onerous financial requirements that must be complied with whilst the company is trading. This generally means that there will be higher accounting expenses and a more rigorous approach to auditing the companies books than may usually be expected for a partnership or sole trader.

The annual accounts and reports must be filed at Companies House and are usually open to public view along with details of the company’s directors. These are matters that those intending to set up in business should discuss with a qualified professional. The right strategic decisions taken at an early stage can prevent untold problems at a later stage especially if the business becomes very successful.