Partnerships involve two or more individuals sharing ownership and responsibility for a business.
Unlike companies, partnerships do not issue shares and some partnerships may be structured to have unlimited liability.
On any divorce or civil partnership dissolution, both parties are entitled to a fair and reasonable financial settlement. In this series, we explore what a partnership is, and how it might be treated if a marriage or civil partnership ends.
What is a partnership?
Legislation dates back to 1890 for traditional partnerships (“Partnerships”) although more recent legislation in relation to limited liability partnerships (“LLPs” — see a little further below) was introduced in 2001.
Partnership law is based on principles of trust and mutual obligations. Partnerships have been used as one of the preferred vehicles for professional practices, including solicitors, accountants and other professional services providers.
Partnership principles
Professionals in business as partnerships have shared, joint, unlimited liability for each other's acts, and partners all owe each other duties to act in good faith. This is broadly a duty to treat each other honestly and not act unfairly or in a way which impacts negatively on some for the benefit of others.
- Subject to any agreement to the contrary, all partners are entitled to share equally in the profits of the business.
- Likewise, they also contribute equally towards its losses whether those are of a capital or income nature.
- All partners have unlimited, joint and several liability for all debts of the partnership which means that each partner is responsible for not only some of the debts of the partnership but all of them.
- Each partner has the right to take part in the management of the partnership with most decisions being made by majority decisions. Decisions outside the scope of day-to-day matters require unanimity.
- It is not possible for one partner to expel another unless there is some effective mechanism which permits this. There needs to be express agreement on that point, ideally recorded in writing.
- Partners can agree to alter the position, as set out in the Partnership Act 1890 and often do — it’s worth having a sound partnership agreement if you want to create a “customised” relationship.
Limited Liability Partnerships (LLPs)
In 2001 limited liability partnerships were introduced. They have a separate corporate existence in the same way that the company has a separate personality, whereas traditionally partnerships are a collection of individuals who share responsibility without a separate “partnership entity”.
The separate corporate entity offers protection to the individuals and practice within it, and is intended to offer limited, rather than unlimited, liability. There is a similar default regime for LLPs to that in partnerships, but this can also be amended by agreement between the owners of the business.
Governance documents
A well drafted partnership or LLP agreement will deal with things that happen in the event of dispute between partners. Typically, it will include provisions for arbitration in the event of dispute.
Partnership disputes
Sometimes disputes within a partnership lead to deadlock. Learn how this can affect a business.
In a partnership, unless agreed otherwise between the partners, an individual partner can, unilaterally, dissolve the partnership. The effect of a dissolution can mean that the business is forced to come to a stop.
Sometimes a dispute between the partners cannot be resolved, resulting in the partners becoming unable to remain in business together. If they are unable to agree a way forward to wind up their partnership or separate their business interests, the likelihood is that the court will have to become involved.
Valuations
On dissolution, the partnership's assets and liabilities are subject to division, potentially affecting not only the partners, but also their spouses.
Depending on the structure, valuing partnership interests can be challenging, especially if there are disagreements over the business's worth or future prospects. This may call for expert evidence which can add an unwanted layer of expense and complexity to an already fraught situation.
Employment issues
Although partners are not employees, and therefore do not have unfair dismissal rights, they do have the right not to be discriminated against on the grounds of some protected characteristics of which sex, race, disability are a few, as set out in the Equality Act 2010.
What is a quasi-partnership?
A quasi-partnership is not a partnership in the legal sense. It is a company in the usual way, with its own corporate entity.
A company may be held to be a quasi-partnership if the business was formed on the basis of a close personal relationship between the shareholders.
What is the relevance of a quasi-partnership?
It would likely affect the valuation of a minority shareholding in the company.
Often (although subject to the opinion given by an expert valuer) the court will apply a discount to the valuation of a minority shareholding.
However, if the company is treated as a ‘quasi-partnership’, the court may determine that as there is a close relationship between the shareholders, the minority shareholder would only sell their shares as part of an overall sale of the business. If so, its treatment for the purposes of valuation might be closer to how a partnership would be valued and no minority discount would be applied.
For expert advice speak to our divorce and separation solicitors.
