What is the Partnership Act 1890?
Business partnerships are regulated under a little known law from 1890 – The Partnership Act. Under the Act a ‘partnership’ is formed when two or more people join together in business to share a profit. This does not include LLPs (Limited Liability Partnerships) or Limited Partnerships. This can be established by an oral contract or simply by conduct. It is possible, therefore, to enter into a partnership as defined by this act without meaning to. These inadvertent partnerships are referred to as ‘Partnerships at Will’ and are governed by the Partnership Act 1890.
Due to the informal nature of such a partnership forming, there is not always a written partnership agreement in place. This becomes a problem if certain issues arise or disagreements occur further down the line. In these cases, the Partnership Act will apply with consequences neither partner foresaw.
Some today view the Act as largely unfit for purpose in modern society. There are certain clauses which make it more of a hindrance than a help to those who unwittingly find that their business activity falls under the jurisdiction of the Act.
How does the Partnership Act affect me?
If you do not have a written partnership agreement your partnership is governed by the Act which states:
1. that a partner shares equally in the profits of the business irrespective of the amount of time or effort he or she has put into the business.
This can be problematic in partnerships where one partner is part-time, or has contributed only capital but nothing more. Under the Act, any profits are to be shared equally if no other formal agreement exists to prove profits are to be divided differently.
2. A partner cannot retire. if one partner decides to leave or dies, the partnership must be dissolved, the assets divided up and a new partnership (or other business) formed.
This can be time-consuming, complicated and expensive for all parties
3. A partner cannot be expelled. under the Act, the partnership must be dissolved and reformed, which bears many legal complications.
With this in mind it is recommended that all partners enter into a ‘Partnership Agreement’ or Deed to regulate the agreement and to allow the partnership to continue on the exit of one partner.
How can I find out more?
While the clauses of the Partnership Act might not suit modern day practices, it is important to have an understanding of the implications of the act if you are in or considering entering into a business partnership.
If you require advice on the implications of the Partnership Act 1890, or would like help in putting together a Partnership Agreement or Deed, you should, in the first instance, contact a solicitor. Lawson-West’s experienced team of commercial law experts are able to provide you with all the assistance, advice and insight that you may need. To find out more or arrange a meeting, contact Lawson-West today on 0116 212 1000, or fill in a contact form on our website.View all