B. The Partnership

The partnership allows for an increased capital base, improved borrowing and reduces the problems relating to holidays and sickness. The Partnership Act 1890 (PA 1890) defines a partnership as ‘the relation which subsists between persons carrying on a business in common with a view of profit’. There must be at least two persons associating for the purposes of carrying on a common business which includes any ‘trade, profession or occupation’. The stipulation relating to profit means that the form cannot be used for charitable or non-commercial purposes.

The partnership is not a separate legal person under the law, and partners are jointly liable for the debts and obligations of the partnership without limit, and jointly and independently for torts committed by partners and employees of the firm – even for partners who do not play an active part in the management of the business (so-called ‘sleeping partners’). Partnership is not suitable for a person who merely wishes to invest money in a business without incurring any further exposure to risk.

The definition of a partnership establishes the essential criteria required for proving the existence of a partnership. These are: (i) the existence of a business; (ii) carried on in common; (iii) with a view of profit. Thus the firm can sue and be sued in its own name under the Rules of the Supreme Court, but any judgement against the partnership is binding on the partners. In addition, the Insolvent Partnerships Order 1994 allows a partnership to be treated as an entity which can enter arrangements with its creditors in the same way as a limited company.

The existence of a business

The essential is that there must be some commercial venture. This excludes relationships whose basis is merely joint ownership of property without any common commercial venture.

In Keith Spicer Ltd v. Mansell [1970] the defendant and another person intended to set up a company to take over and run a restaurant owned by the defendant. They opened a bank account in the name of the proposed company but left off the word ‘Limited’. The second promoter ordered goods from the plaintiff for the proposed company, which was never formed and the plaintiff sued the defendant for the price, arguing that the two persons were partners. The Court of Appeal rejected this. The defendant and the other promoter were merely working to form a company but not ‘carrying on a business in common with a view of profit’. Had they actually started trading in anticipation of the company’s incorporation the decision would have been different.

Partnership can be formed for the purpose of carrying through one transaction: Mann v. D’Arcy [1968].

Carried on in common

The distinction which is important here is between being merely connected with the business in some capacity and actually participating actively within it. In Briton v. The Commissioners of Customs & Exise [1986], the court rejected the existence of a partnership between a husband and a wife where the wife merely helped in what was his business. In Saywell v. Pope [1979], Mr Saywell and Mr Pope were partners and their wives did some work for the firm. The firm expanded in 1973, after which the wives took a more active part in the business. The firm’s accountant suggested that the four should draw up a partnership agreement; this was done but the agreement was not signed until June 1975. Between 1973 and June 1975, the bank mandate still only mandated Mr Saywell and Mr Pope, the wives contributed no capital. A share of the profits had been credited to them for 1973 and 1974 but they had never drawn on them. The court agreed with the Inland Revenue that the wives only became partners in 1975 since, before the signing of the agreement, the wives had never done anything in the capacity of partners; they had never been integrated into the firm.