Nature of Partnership

Overview

A partnership is not a separate legal entity. It consists of its members collectively. They can sue and be sued in the firm name under court rules. However, court orders are made by or against the partners personally and collectively.

Partners are ultimately jointly and severally liable for the liabilities of the partnership. In the first instance, they are entitled to have recourse taken against partnership assets. Ultimately, recourse may be had to their personal assets.

Partners are the agents of each other in entering partnership contracts. Partners may enter contracts on behalf of the partners as a whole, in relation to matters which are within the scope of the partnership. Where a partner appears to have authority in relation to a particular matter, an outsider is usually entitled to assume that he has that authority.

Some persons who are held out and labelled as partners, may, in fact, be employees. However, they may be deemed partners as against third parties who have no reason to know and who are not aware of their actual status and position. A partnership for a purpose forbidden by law will not be enforced.

A person may not sue or be sued by a firm of which he is a partner.  He may, however, sue his fellow partners in their personal capacity.  This may be done as part of a partnership action, in which the court directs a full account to be taken, of the partnership’s assets and liabilities.

Partner’s Interest

The partners’ interest in the partnership assets is not a direct interest in the assets themselves. During the course of the partnership, each partner is entitled to require that the partnership assets are used for the purpose of the partnership business. Ultimately, each partner is entitled to his share of the net partnership assets on winding up, after they have been realised, converted into money and all liabilities have been paid off.

The extent of a partner’s share depends on the partnership agreement or in its absence, the  Partnership Act. The Partnership Act declares that in the absence of an agreement to the contrary, whether specific or implied, all partners are entitled to share equally in the capital and profits of the business and must contribute equally towards losses.

The presumption of equality applies regardless of whether the partners have contributed capital equally or unequally or bring different skills, connections or effort/ work to the business. It may be possible to infer, that different treatment is intended to apply from the firm’s books, the circumstances or the customs of the trade.

The creditors of an individual partner cannot attach his individual interest in the partnership. No order can be made charging their interest. There is a special mechanism, by way of equitable execution, whereby a receiver may be appointed of a partner’s share of the profits. The creditor has no direct right to attach the partner’s shares.

Realisation of Share

On a dissolution of the firm, each partner is entitled to require that the partnership assets are sold and divided to pay the debts and liabilities and have the surplus if any distributed. Death, retirement, expulsion or any change in membership terminates the partnership and triggers a dissolution, in the absence of an agreement to the contrary.

Written partnership agreements usually provide for events that would otherwise trigger a dissolution. The agreement may provide the partnership continues so that a winding up is avoided. It is desirable to provide, for example, the partnership is not dissolved, on the departure of a partner, where two remain.

The outgoing partner would be entitled to have a proportionate share of the partnership assets, net of liabilities, distributed on a winding up. Accordingly, the partnership agreement should set out the manner in which the outgoing partner’s entitlements are accounted for and dealt with.

The partnership agreement may provide for the payment of the value of the outgoing partner’s share. More commonly it may provide that the value of the interest is credited or suspended so that there is no immediate right to payment.  The interest may be forfeited, in whole or in part, depending, for example on the partner’s length of service.

In the absence of agreement otherwise, a partner may apply to the court to have accounts taken and enquiries made, in order to fix the value. The outgoing partner may apply to the court to have the partnership wound up. If the remaining partners are content to continue the partnership, the court may require payment of a valued amount, and not require the winding up of the partnership. The outgoing partner may agree to a valuation of his share with the remaining partners.

Composition

Companies can be partners. A partnership can be made up of individuals or of individuals and a company (or companies).

Partnerships may exist between partnerships.  This commonly happens in international professional services firms.  In more recent times, such firms have used limited partnership vehicles established under the law of other jurisdictions.

The maximum number of partners is 20. In strict terms, a partnership with an excess number of partners is automatically dissolved. The limitation to 20 partners does not apply to firms of accountants and firms of solicitors.

The Interpretation Act provides that for the purpose of the interpretation of legislation references to a “person” are deemed to include a non-incorporated body including partners and partnership.

Capacity

The general principles that apply to contracts with minors apply in the context of partnerships. A minor (under 18 years) may be a partner. The minor may repudiate the agreement within a reasonable period after they reach the age of 18 years. He may relieve himself of liability on partnership contracts entered during his minority.

A partner or apparent partner who is under 18 years of age, is not liable for the obligations of the partnership.  The firm is bound by his actions. However, the minor himself will not incur a liability to the co-partners or third partners for the debts or actions of the partnership.

Mentally disabled persons may enter partnerships, provided that the other partners are unaware of the disorder at the time, entered the agreement in good faith and no court petition has issued to appoint someone to manage the person’s affairs.

A bankrupt person can enter a partnership. However, he commits an offence if he obtains credit for the partnership without disclosing that he is bankrupt. He cannot conduct business other than in the name in which he was made bankrupt. In practice, this severely limits the freedom of a bankrupt person to carry on business in partnership.

Partnership Obligations

The law looks to the individual members of a partnership to enforce partnership obligations.  The partnership debts and obligations are payable by the partners personally, although they are primarily payable out of partnership income and assets.  Ultimately, if there are insufficient partnership assets, the individual partners may be obliged to make up the shortfall from their personal assets.

Each partner is an agent for his fellow partners. Partners may sign contracts in the firm name. Contracts made by a partner in the course of the partnership business are deemed to be made with the partners collectively.

It is necessary to identify who are the partners from time to time, in order to ascertain who is liable for the partnership liabilities and obligations. The Register of Business Names may assist in identifying the individual partners who constitute the firm name.

Because the firm is not a separate legal entity, the individual partners are not debtors and/or creditors of the firm.  Trading profits accrue to them automatically and may be the subject of drawings. Their rights are to an account of the net assets on a winding up.

Partners are not employees of the firm, as there is no separate entity.  They cannot be their own employer. Notwithstanding that that some of their income may be labelled as salary, it is not employment income, nor is it treated as such from a taxation perspective.

Identity

Partnerships are sometimes treated as if they were a separate entity from their members in everyday life.  A partnership may appear to continue to exist for many generations under a common name, while with the actual partners change over time.

The legal position is that there is a change in the identity of the partnership as its composition changes from time to time, as partners retire and new partners join.

In some isolated instances, the law treats the partners as an entity for some purposes.  The Rules of Courts allow partners to be sued in the firm name.  This does not mean that the partnership has a separate identity.  The Companies Act allows a partnership be wound up as an unregistered company.

Companies

An important consequence of the fact the partners are not a separate legal entity is that the individual members do not have legal limited liability.  This is in sharp contrast with the position with companies. The company is the entity which is liable on its obligations. The members of a limited liability company have no obligation to contribute to the company’s debts, beyond the obligation to pay unpaid calls, if any on their shares.

Company Law is a good deal more comprehensive and structured in relation to the default rules that apply.  The Companies Act provides in detail for the rights of shareholders, directors and for other matters. The legislation is modern and detailed. In contrast, partnership arrangements are largely a matter of agreement between the parties.

The Partnership Act dates from 1890 and provides the default partnership rules.  They are much less detailed than those provided by the Companies Act. A partnership agreement is desirable to establish governance structures and economic rights, other than in cases of simple partnerships with uniform rights and obligations.

Taxation Issues

From a practical economic perspective, companies are taxed twice. The company itself pays profit on its taxable profits.  The shareholders pay income tax on dividends or salary received.  In contrast, partners are taxed when the partnership income is earned or received. This may or may not coincide with the distribution of monies to the partners.

Partners are taxed on their share of partnership profits at their marginal rate. In contrast, companies are taxed at the much lower corporate tax rate. They need not be distributed and can be used for reinvestment, without having suffered tax.  Taxation rules require that one partner is treated as a precedent partner, in order to make a separate partnership taxation return.

The effective double taxation of a company relative to partners is potentially disadvantageous.  In Ireland, the disadvantage is substantially less, due to the low rate of corporation tax on company profits and the possibility of retaining earnings within the company itself. In this case, it will be subject to the relatively low rate of Corporation tax rate only. Accordingly, in many cases, companies will be more tax efficient.

Firm Contracts

The Partnership Act provides that persons who have entered into a partnership with one another, are called collectively “a firm”. The name under which the business is carried on is the firm name under the Act.  The firm name is simply another name for the partnership.  The firm name may continue, notwithstanding the change in the underlying partnership.

If a person enters a contract with a partnership, a change in the firm identity will not terminate the contract.  It will be presumed to be a contract with the persons who constitute the partnership from time to time.  However, this does not mean that retiring partners are simply excused from the contractual obligations.

Where a person enters a contract with specific individuals whose identity are part of the reason for contracting, the contract may not accrue for the benefit of successor partners, without his consent. It is will be a matter of the interpretation of the contract, whether the identity of the original partners was an important or critical factor to the contract.  This may occur where, for example, the existing partners have particular skill on which the external third party relies.

A partnership to do a criminal act or unlawful act is illegal and may constitute a criminal conspiracy. The illegality may relate to the manner in which the business is conducted or in relation to some other aspect of the business. For example, where a person requires certain qualifications to practise a particular business such as a solicitor, a partnership with a non-qualified person is void and of no effect.

Business Names I

Partners can carry on business under the firm name or their personal names. If they use a firm name, they must register it with the Companies Registration Office, under the Registration of Business Names Act. The particulars of the firm name and the partners’ particulars are entered in the Register of Business Names. The Register of Business Names is public and can be inspected.

The obligation to register a business name applies to every firm having a place of business in the State which carries on business under a name which does not consist or include the surnames of all partners or individuals and corporate names of all partners of all companies. A change in the identity of the partnership may need to be registered.

The failure to register a business name is an offence. Registration or non-registration may be significant evidence as to whether a person is in fact in partnership, although it is not conclusive.

Business Names II

The following details must be registered.

• business name;
• nature of business;
• principal place of business,
• names, nationalities and usual place of residence or business occupation of partners,
• the corporate name of company partners;
• names and date of adoption.

The relevant particulars must be registered within one month. If there are any changes, they must be registered within one month after the change. Registration may be refused for an undesirable name.There is no monopoly on a registered business name. The fact that a business name is already registered, does not preclude another person registering it. There may be other issues in terms of passing off and breach of trademark.

Other Name Issues

Using a name which is a company name or a breach of someone else’s trademark or goodwill can make the partnership subject to legal action for breach of trademark or for passing off.  The same issues apply to partners and partners’ names as apply in relation to a sole trader or a company which trades under a name other than its own.

• present Christian and surnames of partners;
• former Christian names and surnames;
• nationality if not Irish
• name of the body corporate; and names of its directors.

It is an offence to not to comply.

References and Sources

Irish Sources

Partnership Act, 1890

Partnership Law 2000 Twomey M. Butterworths

UK Sources

Lindley & Banks on Partnership: (19th Revised edition) 2016  Banks, Roderick I’Anson

Partnership & Llp Law (8th edition) 2015  Morse, G.

Partnership Law (5th Revised edition) 2015  Blackett-Ord, Mark; Haren, Sarah;