What is a partnership? - Definition of the word "partnership"
Who other than the partnership itself is also liable for the debts of that partnership?
Before considering the insolvency of a partnership it is useful to consider how the law defines "what is a partnership"?
Believe it or not the definition of the word "partnership" is found in an Act of Parliament that is over 120 years old - The Partnership Act 1890.
Legal definition of the word "Partnership"
Section 1 of The Partnership Act 1890 defines the word "partnership" as,
"(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit
(2) But the the relation between members of any company or association which is -
(a) Registered as a company under the Companies Act 1862, or any other Act of Parliament for the time being in force and relating to the registration of joint stock companies; or
(b) Formed or incorporated by or in pursuance of any other Act of Parliament or letters patent, or Royal Charter
is not a partnership within the meaning of this Act".
What does that legal definition of the word partnership actually mean?
First of all the common sense position is that if you are trading through a limited company then that is definitely not a partnership. Confusion sometimes occurs however when the owners of a limited company wrongly describe themselves as partners. They are not partners - and partnership insolvency law does not apply to such people. Owners of a limited company should be described as shareholders or members of that company.
Having eliminated the word "company" from partnership considerations you will see that if you have set up in business with a friend with the intention of making it a profitable business then you are involved in partnership - and partnership law applies. This is true even if there is no written partnership agreement.
By contrast if you belong to a non profit seeking Club such as a small local football club or community organisation that does not intend to be profit making then that is classed as an association not partnership.
Who are liable for the debts of a Partnership?
If Mr Cornwall and Mr Devon trade in partnership as CD Couriers then a legal attack can be made by creditors of the courier business against each of,
- CD Couriers and
- Mr Cornwall and
- Mr Devon
In other words if you enter into a partnership with another person you expose all of your personal assets (such as your home) to partnership creditors. Should Mr Cornwall have few personal assets he may be more inclined to pursue risky business ventures as he has nothing to lose. By contrast if Mr Devon has a lot of personal money that can be put at risk by his partner's inclinations. A partnership might therefore be considered to be a dangerous legal vehicle in which to conduct a business. It costs little to convert a partnership into a limited company.