Partnership is essentially a relationship between people carrying on a business in common with the intention of making profit. Business partnerships are not limited to a specific type of business or industry and the partnership can include any trade, occupation or profession. The partnership could be between individuals or between individuals and companies.
There are different types of partnerships, including general partnerships and limited liability partnerships. The type of partnership will dictate the steps needed for the formation and operation of the partnership.
A primary condition of a valid partnership is the sharing of profit between the partners. When considering whether a partnership exists in a business venture, it is important to consider whether there is sharing of profits between the partners. However, a collaboration is not automatically considered a partnership because the parties concerned share in the profit. For example, a lender whose interest varies with the profits is not generally considered a partner. A widow or child of a former partner who receives a proportion of the firm’s profits will not be considered partners. Additionally, an employee or agent whose remuneration varies with the firm’s profits may not be considered a partner.
A key indicator that an individual or a company is a partner is that they share the firm’s profits as well as the firm’s losses. The starting point for most partnerships is that the partners share the profits and the losses equally. If profits are to be shared unequally then it should be specifically agreed and expressly stated in the partnership agreement. If partners agree to share profit unequally then losses will also be shared unequally unless there is a contrary agreement.
Partners are not entitled to remuneration for acting in the partnership business unless the partners expressly agree that the partners shall receive salary for acting in the partnership business.
One of the questions we hear a lot is whether there is a legal requirement for a partnership to have a written partnership agreement between the partners for the partnership to be valid. Although advisable, there is no requirement for a written partnership agreement for the partnership to be valid. However, when one considers that a key function of the partnership agreement is to set out in writing the nature of the partnership business as well as the nature of the relationship between the partners and the management of their business, then it is clear to see why business partners are often advised to have a partnership agreement in place.
In the absence of contrary agreement, all partners have equal say in the management of the partnership business.
Having a written partnership agreement that expressly sets out the wishes of the partners helps to deal with any future disputes between the partners. In fact, a well drafted partnership agreement will minimise the risk of protracted disputes between the partners of any partnership business