Giving advice to a business partner
The legal definition of a ‘partnership’ in the UK is: ‘a partnership is a relationship resulting from a contract or agreement, oral or written. The implementation of that agreement creates the partnership relationship. If it is not implemented, it is not effective.’1Dickenson v Gross [1927] 11 TC 614 A business partnership can exist when two or more people carry out a business together to make a profit. A partnership is sometimes also called ‘a firm’. There is no limit on the number of partners a partnership may have. See .
A partnership can also be entered into informally. A written agreement is not needed for a partnership to exist, and the Partnership Act 1890 applies in the absence of a written agreement. The partners share equally in the profits and losses of the business unless otherwise agreed.
A partnership can trade using the partners’ names or a separate business name. Partners do not register the partnership with Companies House. Their business name should not include ’Ltd’, ’limited’, ’LLP’ or ’limited liability partnership’ or any other use of wording that infers a status it does not have.
A partnership set up formally through a written partnership agreement should cover how any profits in the business are shared out between the partners and how the partnership can be ended. Unless the partnership rules state otherwise, contracts can be entered into by any of the partners. The partnership agreement can be useful if there is a dispute between the partners.
If there is no written agreement it can be difficult to identify whether a business partnership exists. If you are unsure whether a business is being run as a partnership, get specialist advice.
Usually, partners personally own a share of the partnership’s assets and are jointly and severally liable for the debts accrued by the partnership. However, each partner always has sole liability for their own income tax and national insurance contributions.
Unless an agreement states otherwise, a partner is not liable for debts accrued by the partnership before they joined.
Unless the other partners and creditors agree otherwise, a client who has left a business partnership continues to be liable for the debts accrued when they were a partner.
Unless suitable notice is given to creditors and the client’s name is removed from the partnership’s paperwork, a client could be held liable for partnership debts that are accrued after they leave the partnership. The client also needs to check the terms of any written partnership agreement.
A client must do all they can to limit their personal liability for any existing or future partnership debts. If a client is considering leaving a business partnership or disputes liability for a partnership debt, signpost the client to specialist advice.
If the client or the partnership is struggling to pay debts, then the client’s income and assets (at home and in the business) may be at risk. Consider the client’s overall situation.