Brief guide to partnership law

What share of the partnership does each partner own?

In the absence of a partnership agreement each partner shares equally in the profits of the business regardless of the amount of time or effort he/she has put into business. If there is a partnership agreement then that will decide how the profits and losses are divided.

What happens if a partner wants to leave?

The partnership must be dissolved, even if there are more than 2 partners who want to carry on. A partnership ends immediately upon one of the partners serving notice to leave the partnership. The assets are then divided between the partners according to their partnership shares. The partner who is leaving can immediately work for the partnership’s competitor if there is no partnership agreement containing non-compete clauses. Unless the partners have agreed otherwise, any of them have the right to give notice to their fellow partners that he/she is dissolving the firm without notice. This means that the partnership could be dissolved in matter of hours.

Death of a partner

• The partnership must be dissolved immediately (Section 33 Partnership Act 1890).
• The partnership must sell its assets to pay off any creditors, and will then distribute the remaining funds between the partners – for example, the deceased partners share will be allocated as per their Will.
• The wife or husband of a deceased partner is not liable for paying off the creditors of the partnership – they are entitled to any partnership money left to them in Will. However, other partners remain personally liable for a partnerships debts and may have to sell partnership assets to obtain money to pay debts.
• An impatient spouse of a deceased partner could sue the surviving partners if the partnership capital is not released as quickly as he/she would like it to be.

How do partners split the profits at the end of the year?

In the absence of a partnership agreement, all partners are to share profits of the business equally (Section 24 Partnership Act 1890).

What happens to any debts/ losses?

All partners are responsible for losses and debts and are required to contribute equally (Section 24 Partnership Act 1890) – although a partnership agreement may state that the partners have to compensate each other according to their respective partnership shares.

How do partners share any liabilities?

• Every partner in the partnership is liable jointly (while a partner) for all debts and obligations of firm.
• After death the estate of a deceased partner is also severally liable for debts and obligations but subject to previous payment of separate debts (Section 9 Partnership Act 1890).
• Any wrongful act/ omission of any partner who is acting in course of business or with authority of co-partners that causes loss/injury/penalty of any person who is not a partner of the partnership results in every partner being liable to same extent as the partner whose act/ omission caused the loss (Section 10 Partnership Act 1890).
• Where a partner misapplies money/property of 3rd person, the partnership is liable to make the loss good (Section 11 Partnership Act 1890).
• All partners are liable jointly with co-partners as well as severally for everything the firm becomes liable for while a partner of the firm (Section 12 Partnership Act 1890).
• All partners are liable to any 3rd person who gives credit to firm, whether particular partner has had any dealings with 3rd party (Section 14 Partnership Act 1890).
• A partner is not liable for anything done before he/she became partner (Section 17 Partnership Act 1890).

Who owns property that is not held in the partnership name?

• If property is held by co-owners but the property or interest in land is not partnership property (for example, is not a property that is used by a partnership to conduct its business) then the property belongs to the individuals as individuals and not as partners. They will be co-owners as there is no business carried on ‘with a view to profit’ (Section 20 Partnership Act 1890).
• Any property bought with the partnership’s money has been bought on account of the partnership and will be held by the partner(s) in whose name it is registered on trust for the partnership (Section 21 Partnership Act 1890).