330 Chapter 12Partnership, limited liability partnership and choice of legal status
‘In common’
‘In common’ means not only that all of the partners carry on the business, but that the busi-
ness is carried on for the benefit of all of them. Most partnerships employ workers. These
employees are not partners. They may help to carry the business on, but it is not carried on
for their benefit.‘View of profit’
‘View of profit’ does not mean that the business must make a profit, but rather that the
partners should intend to make a profit. This intention to make a profit distinguishes
partnerships from non-profit making members’ clubs, such as social clubs.
Despite the statutory definition provided by s. 1(1) of the Partnership Act, it is often
difficult to tell whether a business is, or is not, a partnership. Some slight help is provided
by s. 1(2) of the Act, which states that a company cannot be a partnership. Section 2(1) says
that the sharing of gross takings does not necessarily make the people who share them
partners. Section 2(2) tells us that the mere fact that people own property together does not
necessarily make them partners, even if they share any profits made from the property.
However, s. 2(3) says that if a person receives a share of the profits of a business this is
strong evidence, although not conclusive evidence, that he is a partner in the business. So
sharing gross takings is not a strong indication of partnership, whereas sharing profits is.
Gross takings consist of all the money which a business takes in. Gross profits are made up
of any surplus which remains once all the business liabilities have been taken away from
gross takings.
In Khan vMia (2000)the House of Lords decided that persons who were intending to
trade as a partnership could be partners even before the business actually began to trade.
Merely agreeing to be partners was not enough. However, as soon as contracts were made
on behalf of the business a partnership was formed even if the business (a restaurant) had
not started to trade.Characteristics of a partnershipThe two most important characteristics of a partnership are the unlimited liability of the
partners and the power of partners to act as agents of their fellow partners.Unlimited liability
Partners are not protected by limited liability because a partnership is not a legal person
with a legal identity of its own. Every partner is liable for the firm’s (partnership’s) debts to
the full extent of his or her personal wealth.
These concepts of agency and unlimited liability can have extremely serious con-
sequences, as is demonstrated by the classic quotation from James LJ in Baird’s Case
(1870):Ordinary partnerships are by the law assumed to be based on the mutual trust and confidence of
each partner in the skill, knowledge and integrity of every other partner. As between the partners
and the outside world (whatever may be their private arrangements between themselves), each
partner is the unlimited agent of every other in every matter connected with the partnership
business...A partner who may not have a farthing of capital left may take money or assets of the
partnership to the value of millions, may bind the partnership by contracts to any amount...
and may even – as has been shewn in many painful instances in this court – involve his innocent
partners in unlimited amounts for frauds which he has carefully concealed from them.