170 11: Partnerships Part D The formation and constitution of business organisations
2 Forming an unlimited liability partnership
Partnerships can be formed very informally, but there may be complex formalities to ensure clarity.A partnership can be a very informal arrangement. This is reflected in the procedure to form a
partnership.
A partnership is formed when two or more people agree to run a business together. Partnerships can be
formed in any trade or occupation or profession.
In order to be a partnership, the business must be 'carried on in common', meaning that all parties must
have responsibility for the business. In other words, there is more than one proprietor. A husband and
wife who run a shop together are partners, but a shop owner and their employee are not. In law then, the
formation of a partnership is essentially straightforward. People make an agreement together to run a
business, and carry that agreement out.2.1 Common formation formalities
In practice, the formalities of setting up a partnership may be more complex than simple agreement. Many
professional people use partnerships. These business associations can be vast organisations with
substantial revenue and expenditure, such as the larger accountancy firms and many law firms.
Such organisations have so many partners that the relationships between them has to be regulated. Thus
forming some partnerships can involve creating detailed partnership agreements which lay out terms
and conditions of partnership.2.2 The partnership agreement
A written partnership agreement is not legally required. In practice there are advantages in setting down
in writing the terms of their association.
(a) It fills in the details which the law would not imply – the nature of the firm's business, its name,
and the bank at which the firm will maintain its account for instance.
(b) A written agreement serves to override terms otherwise implied by the Partnership Act 1890 which
are inappropriate to the partnership. The Act for example implies that partners share profits
equally.
(c) Additional clauses can be developed. Expulsion clauses are an example and they provide a
mechanism to expel a partner where there would be no ability to do so otherwise.3 Terminating an unlimited liability partnership
Partnerships may be terminated by passing of time, termination of the underlying venture, death or
bankruptcy of a partner, illegality, notice, agreement or by order of the court.Termination is quite simply when the partnership comes to an end.Illustration^
(^)
Alison, Ben, Caroline and David are in partnership as accountants. Caroline decides to change career and
become an interior designer. In her place, Alison, Ben and David invite Emily to join the partnership.
As far as third parties are concerned, a partnership offering accountancy services still exists. In fact,
however, the old partnership (ABCD) has been dissolved, and a new partnership (ABDE) has replaced it.
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