Business Partnerships – What Do They Involve?

What is a Partnership?

A partnership can be defined as; two or more people or organizations carrying on a business together with a common goal of making a profit. It is an association of two or more persons carrying on a business as co-owners, with the objective of making a profit together.

Arises from an Agreement by Two or More Parties

It can be established by an oral agreement or written contract and is normally assumed to exist when there is a perceived intention (by the parties concerned) to be partners. A partnership is a common and simple method of structuring a business. It is inexpensive and does not have to comply with many regulations or laws, except those contained in the partnership agreement which binds the parties involved together.

A partnership involves co-owners who have agreed to work together in the business and the partnership has the intention of making and sharing the profits between the partners. If these criteria are met then you are operating a partnership. Different rules apply for other structures such as a sole trader or a company. A partnership can come into existence by the people concerned discussing it and agreeing to go into business together.

How Does a Partnership Work?

A partnership involves a contract between the partners to engage together in a business. They agree that the purpose is to make a profit and that the assets and value of the business, as well as responsibilities, are shared by the partners.

A partnership is unlike a company, which is a legal entity in its own right. A partnership is not a separate entity (or legal person), even if there are many partners. You usually go into partnership because the growth of the business is such that more capital, expertise, or more people are required to cope with the growth of the business.

Some partners may contribute nothing at all except that their involvement in the business, yet they still have the full rights of a partner. A partner that contributes property or capital, but is not involved in the business (they do not provide any labor or skills on a day-to-day basis) is termed a “sleeping partner”.

The law under which partnerships are administered in the USA is the Partnership Act. This Act sets out the law regarding how partnerships are to be run and is applied where there is no written partnership agreement in place. A partnership agreement can replace most of the matters laid out in the Partnership Act.

4 Critical Elements in a Partnership

There are 4 important elements in any partnership.

These are:

  1. Not a legal entity. Unlike a company, the partnership is not recognized as a separate legal person (legal entity) as apart from its owners. In a partnership, as well as in a sole trader business structure, the owners of the business are the people who are the entities and liable for the business.
  2. Liabilities unlimited. The partners in the business have unlimited liability as to the debts of the business. This is not the case with a limited liability company where the partner’s liability is limited to the amount that they have not paid up on their shares. While partners may set limits in their agreement, to which each partner is liable, in a legal sense every participating partner’s liability is unlimited.
  3. Partners can take part in every area. In general, partners must consent to most decisions required in the management of the business. However, it is the partnership agreement that clearly outlines if there is a change to the legal position that all partners can take part in the management of a partnership business.
  4. Transfer of interest. Partners cannot transfer their shares to anyone outside the partnership without the agreement of the other partners. The other partners may not wish to bring on the intended replacement, so they can veto the transfer of shares to anyone they are not happy with.

The Partnership Act is the Act that sets down the rules for partnerships which can only be varied by the partners drafting up a formal partnership agreement and including terms different from those set out in the Act. It is recommended that every partnership has a partnership agreement because of the specific needs of a particular partnership, which may not be covered suitably by the conditions and rules set out in the Act.

If the agreement is properly drafted, it can cover issues and set down how problems are to be resolved before they occur. This makes the partnership agreement an essential document in the business structure and makes the agreement a very valuable document in any partnership.


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