What is a partnership?

A legal Partnership comes into force when two or more people start a business that does not have any other legal form such as a limited company.

Often there is a written Partnership Agreement which sets out how the business is to be run but, where there is not, it is governed by the terms of the Partnership Act 1890. Sometimes, Partnership Agreements only cover some important points but not others. Where this is the case, the Partnership Act fills in the gaps.

Unless there is a contrary agreement, a partnership will be an equal one where each partner shares equally in its profits and contributes equally to any losses.

Dissolution

Unlike limited companies, it is easy for a partner to end a partnership. They can do so by giving written notice, or even just by resigning if there are no written terms that the partnership will continue if a partner leaves. A partnership will also come to an end if the purpose of it has run its course, or if one of the partners becomes bankrupt or dies.

When a partnership comes to an end, it is called “dissolution” and the partnership is said to be “dissolved”. What then follows is a process of “winding-up”.

Winding-up

As is the case with limited companies, winding-up essentially involves collecting in all the assets of the business, paying off the debts and then paying anything left over to the partners.

When collecting in the assets, there can be disagreements over which assets belong to the partnership and which belong to the partners. Essentially, any property that is brought into the partnership for the purpose of the partnership business is partnership property, as is any property bought with partnership money. It belongs to the partnership itself and not to the individual partners. An individual partner therefore does not have a call on such property and must wait until there is a final distribution made.

Partners owe various duties to their fellow partners which will affect what the assets of the partnership are.

A partner must not carry on any business of the same nature as the partnership or compete with it unless the other partners consent. If a partner did do this, then any profits made from the competing business are assets of the partnership and must be paid into the partnership during the course of it being wound up.

Similarly, a partner must not derive any personal benefit from any transaction concerning the partnership, or from using partnership property or any business connection. Again, if this is the case, then profits made are deemed to be assets of the partnership and must be paid into the partnership during its winding-up.

Of course, if any money or other assets have been diverted from the partnership, then these too must be repaid during the course of a winding-up.

Once all the assets have been collected in, the partnership’s liabilities must be paid. These will not just include trading debts but also debts due to employees and HMRC (for tax and VAT).

Once this has been done, there will either be a surplus left over or a deficit.

If there is a deficit, this must be paid firstly out of profits, then capital and lastly by the partners having to provide money in proportion to the share of the profits that they are entitled to.

If there is a surplus, then this is paid firstly to partners for any advances made, then to repay capital and finally a distribution in proportion to the share of the profits that they are entitled to.

Court intervention

If the partners cannot agree on matters concerning the dissolution or winding-up of the partnership, then a court can intervene.

Sometimes, this may be necessary to determine whether the partnership has been dissolved and, if so, on what date.

The court can also determine what the assets of the partnership are and what partners must repay to the partnership (due to for example diverting partnership assets, competing with it or making a personal profit from using partnership assets or connections).

The court can also intervene to ensure that the winding-up proceeds effectively.

When to get legal advice

If, following dissolution, you cannot agree with your fellow partners what assets must be repaid into the partnership or whether something is partnership property, and then you should take legal advice. Similarly, if one or more of the partners are blocking an effective winding-up from taking place.

If you think you could do with some advice, please do not hesitate to get legal advice.

Gary Cousins
Business Solicitor