PARTNERSHIPS: AN INTRODUCTION

(A) ABOUT TRADITIONAL PARTNERSHIPS s.1 (1) of the Partnership Act 1890 states that a partnership is ‘‘the relation which subsists between persons carrying on a business in common with a view of profit’’.

This definition tells us that as a partnership is the ‘‘relation which subsists between persons’’, at least two parties are needed to form a partnership and these parties can be either natural persons or corporate bodies. A traditional partnership is an unincorporated business and the only set up requirement is that the partners and the partnership itself register (1) ….. tax purposes. Partners are categorised (2) ….. self-employed by HMRC and are individually responsible for submitting their own Annual Self-Assessment Tax Return (3) ….. the deadline of 31 January each year. Any profits are distributed equally (4) ….. the partners and each will pay tax (5) ….. their share: Income Tax for individuals and Corporation Tax if a partner is a corporate body. There must be a nominated partner to carry out various administrative tasks on behalf of the business, including registering the partnership with HMRC and filing the Annual Partnership Tax Return. The total partnership profits, losses and any other income are allocated (6) ….. the individual partners on the Annual Partnership Tax Return according to their profit share entitlement.

(B) MANAGEMENT The partners can run the business as they choose and there are very few statutory regulations to abide by. It is easy, therefore, to see the benefits of starting a business with this legal structure. The business has the advantage of a wider range of expertise, it is potentially easier to raise capital, the partners can potentially achieve a better life/work balance and there is always ‘moral support’, meaning a partner always has at least one other person to share the burdens of running the business. However, there is a considerable downside to traditional partnerships. Perhaps surprisingly, one of the biggest disadvantages to working in a partnership is the question of emotion. Disputes often arise over the workload of each partner and many struggle with the loss of autonomy. Also, if one partner wants to leave, this can lead to conflict unless a partnership agreement setting out a clear exit strategy has been drawn up. Many people who work together on what they think is a casual basis inadvertently create a partnership by unknowingly satisfying section 1 of the Partnership Act. They may only become aware of this when a dispute arises and a partner who seeks legal advice discovers that not only is he or she a partner but also has joint and several liability for the debts of the business. In cases like this, the partners must rely on the provisions of the Partnership Act and the rules contained within it.

(C) THE EXISTENCE OF A PARTNERSHIP – A RECENT CASE The case of Worbey and Farrell v Campbell and others (2016) is a reminder that in the absence of a properly documented legal agreement, parties to a new commercial enterprise may have differing perceptions about the precise nature of the business relationship between them. The court may then be asked to construe the legal position from the facts of the case and the individual circumstances. The facts of this case were that Mr Worbey, Mr Farrell and Mr Elliot, who were friends at the time, met in a bar in Vienna in 2009 and discussed the development of two new dating apps. Soon after, Elliott, who had IT expertise, set out in an email what had been discussed, describing himself as the “developer” and stating that he held a controlling interest of 51%. He described Worbey and Farrell as “a mixture of investors/marketing gurus, etc.”, with a shared 49% stake. Worbey and Farrell then made some initial but irregular financial contributions to the development of the app. It was later agreed between the parties that Worbey and Farrell would start making a set monthly contribution of £200 towards the costs but they failed to keep up with these payments. Elliott wrote to them, returning the total amount of £2,225 which they had contributed up to that date and stating that he considered the agreement between them to be null and void. Worbey and Farrell challenged this in court as they asserted that Elliott was unable to do this as a partnership had been formed.

The court found for the defendant, stating that there was no evidence to conclude that Worbey and Farrell had assumed any obligations other than the financial contributions which were limited and sporadic and, in any case, reimbursed. The court also noted that the claimants had not been prepared to accept any trading losses. The court ruled, therefore, that while the parties had a common intention to enter into a business relationship, it did not amount to a ‘business in common’ under the provisions of the Partnership Act and therefore did not constitute a partnership.