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.… Read the rest

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Principal Type The only general form of limited partnership available in Ireland for trading purposes is that under the Limited Partnership Act 1907.  A limited partner may not take part in the management of the firm.  He may not bind the firm. In return, and provided that the relevant conditions are complied with, he has limited liability for the partnership debts in a winding up of the partnership. A limited partner under the legislation is, in effect, an investor. A limited partnership may be useful in relation to the investment of venture capital.  It allows the dormant partner, the investor, to invest in a partnership while retaining limited liability. An advantage of a limited partnership is that there is one layer only of tax for the partner/ investor.  An investor in a company may be effectively subject to two layers of tax on the company’s trade.  The company itself is taxed, and the investor is taxed on distributions and dividends and on winding up.… Read the rest

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Principal Type The only general form of limited partnership available in Ireland for trading purposes is that under the Limited Partnership Act 1907.  A limited partner may not take part in the management of the firm.  He may not bind the firm. In return, and provided that the relevant conditions are complied with, he has limited liability for the partnership debts in a winding up of the partnership. A limited partner under the legislation is, in effect, an investor. A limited partnership may be useful in relation to the investment of venture capital.  It allows the dormant partner, the investor, to invest in a partnership while retaining limited liability. An advantage of a limited partnership is that there is one layer only of tax for the partner/ investor.  An investor in a company may be effectively subject to two layers of tax on the company’s trade.  The company itself is taxed, and the investor is taxed on distributions and dividends and on winding up.… Read the rest

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Existence of Partnership A partnership agreement need not be in writing. It may be verbal or implied from the conduct of the parties. The way a partnership is in fact conducted may provide evidence of an agreement which varies the written partnership agreement. A partnership can exist inadvertently. A one-off transaction cannot be a partnership as it will not constitute the carrying on of business. A partnership can exist irrespective of whether the participants designate it as such or otherwise. A partnership is deemed to exist once the participants carry on business in common with a view to a profit. Once a partnership exists, the details of the relationship between the partners will be governed by the terms of their agreement or if there is no agreement, by the terms of the Partnership Act. In the vast majority of cases, it will be perfectly clear whether or not there is a partnership or it will be a matter of indifference.  … Read the rest

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Written Agreement A partnership is a contract between persons to carry on business in common. The terms of the agreement determine the legal rights and obligations of the partners. The agreement may be as formal or informal as the parties decide.  It should be in writing, so as to provide greater certainty. The Partnership Act 1890 determines what rules apply in relation to particular matters if nothing is stated to the contrary in the partnership agreement. There are some fundamental rules in the Partnership Act which cannot be changed by the term of a partnership agreement. The existence of a partnership agreement is determined in the same way as any other contract. It may arise from conduct, verbally, by informal documents or by a formal partnership agreement. A formal partnership deed is desirable as it leads to greater certainty in relation to the legal relationship and rights of partners. Where there is a partnership agreement, it will usually govern the position.… Read the rest

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Agency of Partners I Each partner is the agent of the other partners in relation to matters within the scope of the partnership. The acts of a partner in the course of business are those of the firm. They are legally binding on the other partners unless a third party is actually aware of the specific absence of authority in the circumstances. The partner’s authority applies to acts and contracts done or made in the normal course of the partnership business. The activity or transaction must be one which is usual for the particular partnership business. It must relate to that business. It must be made by the partner in his capacity as such, rather than personally. Agency of Partners II The partnership agreement may set out the authority of the partners. However, a partner may be held out as having authority by his fellow partners, whether they so intend or not and whether or not he, in fact, has been conferred with the requisite authority.… Read the rest

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Obligation to Account There is no specific obligation in the Partnership legislation which requires partners to keep accounts. Partner are in practice obliged to keep accounts for recording and taxation purposes. Partners must render a true account to each other and give each other full and true information concerning all partnership activities. This requires, in effect that accounts, in the sense of accounting records, be kept of the financial transactions of the partnership, so as to enable the establishment of each partner’s rights and entitlement, from time to time.  This implied obligation to keep accounts effectively applies as between the partners. A partner can apply to court have an account taken of the partnership’s assets, liabilities and activities if the other partners have failed to keep proper accounts, or they have destroyed or falsified documents. If this is the case, inferences may be drawn against the parties concerned in relation to a failure in their general duty to account.… Read the rest

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Meaning of Goodwill Goodwill is commonly an important partnership asset. It is usually earned over time in the course of the business and represents the propensity of customers to return to deal with the firm. The value of goodwill is represented by the difference between the total value of the component assets and the total value of the business as a going concern. It usually reflects the accumulated business reputation. In one sense, it represents the present value of the future prospective repeat business. The Partnership Act does not refer to goodwill as such and makes no particular provision for it. The partnership agreement may make provision in relation to the ownership and sale of goodwill. There may be provisions for its valuation. In practice, goodwill may only be capable of realisation in the sale of the partnership as a going concern. Ownership of Goodwill The goodwill will usually belong to the partners/ firm.… Read the rest

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Rights and Duties The rights and the obligations of the partners to each other are determined by the terms of the partnership agreement, if and to the extent that there is one. There may be a written or verbal agreement or an agreement by conduct. The Partnership Act sets out rules and presumptions which apply in the absence of an agreement to the contrary. Unless the agreement expressly or by implication covers the position, the provisions in the Partnership Act will apply. In the absence of the partnership agreement providing otherwise, the partners have equal rights and obligations to each other.  This position is commonly varied. A contract providing for the variation of equal rights and duties must exist. Common law principles on contract formation and interpretation apply. Unless otherwise agreed, no new partner may be introduced without the consent of all partners. Management Each partner is entitled, in the absence of agreement otherwise, to participate in partnership decision making and in the management of the partnership business. … Read the rest

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Personal Liability Each partner is liable personally for the debts and obligations of the partnership. Irrespective of the partners’ profit and liabilities sharing ratios, each is ultimately liable to third parties for all partnership debts and obligations. Ultimately, each partner has potentially unlimited liability for the firm’s obligations. Partnership liabilities are payable primarily, from partnership assets. The partnership assets are available to meet partnership liabilities and obligations (and not personal liabilities) in the first instance. If there are insufficient partnership assets, the partners must ultimately pay the partnership debts and obligations from their own resources. Each partner is jointly liable for the partnership debts. A partner who pays disproportionately relative to his fellow partners may claim a contribution from his fellow partners. If his fellow partners have insufficient assets available (ultimately on bankruptcy, that partner may have to carry a disproportionate or total liability for the partnership debts and obligations. The unlimited liability of a partner is in contrast to the position in respect of a shareholder in a company.… Read the rest

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Partnerships and Insolvency Partnerships constitute an important mechanism for undertaking business.  In certain sectors, such as the legal profession, a business may not be incorporated as a company and must practice as sole traders or partnerships.  A partnership will arise automatically, where persons undertake business in common. A partnership is not a separate legal entity.  Ultimately, the partners are fully and personally liable for the debts of the partnership. There are special bankruptcy rules in respect of partnership.   The primary recourse is to partnership assets before there is recourse to the partners’ private assets. The High Court has jurisdiction to wind up and dissolve partnerships. An important basis, in the context of insolvency, is that the partnership business is being carried on at a loss.  A partnership with more than eight members is subject to Companies legislation, by which it can be wound up as an unincorporated body. Insolvent Partnership An insolvent partnership can be wound up on most of the same grounds, as an individual may be adjudicated bankrupt.… Read the rest

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Partnership Assets A partnership is not a separate entity and is simply the aggregate of its members. The interest of an individual partner in the partnership assets is a chose in action. It is a “bundle of rights” which derive from the partnership agreement or the default Partnership Act provisions, which is enforceable between the partners, ultimately, by legal action. The partnership property may be vested in one or more partners on behalf of the partnership. However, the rights or entitlement of a partner to it in a personal capacity may be determined only on the ultimate winding up of the partnership. The partner is not entitled to any particular item of partnership property. His ultimate entitlement is to a share of the net proceeds of the partnership assets, after paying off liabilities.In order to be categorised as separate property outside the scope of the partnership, the asset/ property must cease to be partnership property or the partnership itself.… Read the rest

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Waiving Winding Up Following dissolution, either with or without a court order, the partnership must be wound up. The strict position, in the absence of an agreement to the contrary, is that upon the dissolution of the partnership, the partners are entitled to have the property of the partnership applied towards payment of the debts and liabilities of the firm and have the surplus applied towards whatever sums may be due to them as partners. Commonly the winding up is waived by the terms of the partnership agreement. Even where it is not so provided, the parties may, and often do waive the requirement where a winding-up is not desired or would be economically disadvantageous. Alternative provision is usually made when a partner retires, leaves or dies.  He or his estate may be (at best) paid the value of his partnership share.  The value may be realised over a longer period.… Read the rest

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Court Winding Up A partner may apply to the court to have the affairs of the partnership wound up. Unlike the position with a company, the creditors do not have the right to apply to the court to have the partnership wound up under the Partnership Act. Creditors may apply under the Companies Act to have the partnership wound up as an unregistered company in certain cases. A partnership of eight or more persons may be wound up as a non-registered company under the Companies Act. Certain partnerships formed outside the State may be wound up under the Act, even if they have less than eight members. On the dissolution of the partnership, the partners are entitled to have the property of the partnership applied towards payment of the debts and liabilities of the firm and have the surplus applied in payment of whatever sums may be due to them as partners.… Read the rest

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Partners’ Interest I Partnership property is not directly owned by the partners. It is available primarily to satisfy partnership debts. A partner who uses partnership property for his own purposes must account to the partnership for the free use of the property.  This follows from partner’s duties and obligations of utmost good faith. On a winding, up, partnership property must be sold and distributed in accordance with Partnership Act and Bankruptcy rules. In a sense, what the partners “own” and what they are entitled to, is their respective shares of the ultimate balance on a winding up of the partnership assets. The partner’s interest is a “chose in action”, a right that can be asserted ultimately by legal action. They have no direct interest as such in the partnership property. The partner’s interest is his share of the net balance of his entitlement as a liquidated sum, on the actual or hypothetical dissolution and winding up.… Read the rest

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Termination Dissolution refers to the termination of the partnership which may be, but may not necessarily be, followed by the winding up of its assets and liabilities. A technical dissolution, without a winding up, may occur on a change in the membership of the partnership. Upon a technical dissolution,  the partnership may continue with new or with the continuing partners. The outgoing partner may receive a lump sum or another payment for his interest. The dissolution does not require recourse to the court. The default position is that a partnership may be terminated on notice and that it must be thereupon wound up. Partnership agreements may provide to the contrary. A fixed term partnership can be wound up before the termination of its term, only with the agreement of all partners. Grounds for Termination The default position is that of a partnership at will. Any partner may dissolve the partnership by giving notice of dissolution.… Read the rest

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Assignability I The Partnership Act provides that a person may not become a partner without the consent of all other partners.A partnerships agreement may make other provision. For example, it might allow for the admission of a partner with the approval of the majority. A partner may assign his interest in the partnership. However, the assignee cannot be in any better position than the assigning partner.  He, therefore, takes the assignment, with all the rights and obligations of the assigning partner which affect his interest. Assignability II A new partner cannot be forced into a partnership, without the consent of the partners, unless an agreement otherwise provides.  A right to substitute an assignee as a partner will rarely be permitted. Substitution could be permitted ith the consent of all other partners at the relevant time. The partners may provide for a permitted assignment of the partner’s share in the partnership agreement.… Read the rest

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