Back to previous
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 gov.uk/hmrc-internal-manuals/partnership-manual/pm120100.
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.
 
1     Dickenson v Gross [1927] 11 TC 614 »
If a client is still trading
Give advice about dealing with personal debt emergencies, such as council tax enforcement agents, and also provide basic advice about dealing with personal creditors. You may also be able to advise the client about the implications for continuing to trade, such as the risk to assets and further indebtedness. Since partnerships can be complex, it is often best to seek specialist advice.
Specialist advice is required if the client has any business debts or any complex business issues, such as a disputed tax debt. The client also needs specialist debt advice before deciding how best to proceed with their debts.
A specialist adviser looks at the client’s overall situation (at home and in the business) and also discusses how any action that the client takes could affect whether the client and the partnership can continue in business. The client also needs to be aware that some strategies, such as protected trust deeds, do not usually offer the same protection for partnership debts and the partnership itself may also have to enter into a trust deed.
In some cases, separate strategies may be required to deal with the partnership’s debts. Specialist advice is required. Advisers should have contacts for reputable firms of insolvency practitioners or accountants who can advise clients where specialist advice is required and can then refer on – check what your organisation’s policy is for referrals.
If a client has ceased trading
Check whether the client has any complex business debts, such as an ongoing liability for a business lease. If any complex debts are identified, the client needs specialist advice. Also check whether the client notified their creditors, suppliers and HMRC that they had stopped trading with the partnership and complied with the terms of any partnership agreement. If you are unsure whether the client has exited the partnership appropriately, always signpost the client to specialist advice with the client’s consent. It is important to do that because specialist advice may help the client to limit their personal liability for any existing or future partnership debts.
Providing there are no complex debt needs and the client has exited the partnership appropriately, you can give full advice about dealing with the client’s debts.