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Fact pattern
Susan Wright, Charles Thompson and John Dodgson are architects, each of whom has, to date, worked on their own account. They are proposing to pool their resources and operate as a partnership. They believe that various benefits, including economies of scale, will result from doing this. There are a number of issues regarding the formation and operation of a partnership on which they seek your advice.
The partnership which the three architects wish to form will come into being at the point at which the definition in s.1(1) of the PA is satisfied. This states that “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”. It is a question of fact as to when this definition is satisfied.
Whilst there is no statutory requirement that there be a written partnership agreement, it is usual to advise that the partners enter into one. It will provide certainty as to how the business relationship between the partners is to be regulated. In addition, it can serve to override provisions of the PA which would otherwise apply to regulate the partnership. We shall now assume that this partnership will have a written agreement.
The partners now ask you for advice on the options available for initially financing the partnership. They have been considering:
(i) Direct investment by a partner
(ii) Allotment of shares in the partnership to partners
(iii) Loan by a partner
(iv) Allotment of shares in the partnership to third parties
(v) Loan by a third party
Your advice is that the partnership can raise finance directly from the partners by way of permanent investment (“capital”). In addition, as with other businesses, a partnership may borrow from individuals (including partners) and third parties, such as banks. Unlike a company, however, a partnership is unable to allot shares to raise finance.
Following this advice, Susan Wright and Charles Thompson agree to invest £20,000 by way of a capital contribution to the business. John Dodgson will invest £10,000 by way of capital contribution and will also lend an additional £10,000, to be repaid over two years.
In relation to these amounts, the partners may provide in their partnership agreement for the level of interest to be paid on both capital and loans. In doing so, consideration may be given as to the proportions in which investment is made. Should they not make provision in their agreement, then s.24 PA provides that “a partner is not entitled…to interest on capital” and that, in the absence of contrary agreement, a loan by a partner to the partnership carries 5% interest.
In addition to investment in the forms noted above, it would also be possible, in future, for the partners to decide to leave profits in the business to help fund future activities. The statutory entitlement to interest on loans is limited only to “actual payments or advances”. It does not extend to a share of profits left in the business. As with capital contributions or loans, the partners would, however, be free to make provision in their partnership agreement for interest on undrawn profits if they wish.
You are now asked to advise on the sharing of profits amongst the partners.
As regards the sharing of profits of the partnership, it would be usual for express provision to be made in the partnership agreement as to the respective entitlement of each partner. In the absence of such provision or any implied agreement, s.24(1) PA operates to provide that all partners are entitled to share equally in the profits of the business. This applies to both income and capital profits, and applies notwithstanding any unequal contributions of capital by the partners.
Capital profits are amounts remaining on dissolution of the partnership following the payment of all creditors and repayment of all capital contributions to partners. These would be divided between partners according to any agreement in force or, failing such agreement, in equal shares as provided by s.24(1) PA.
Susan Wright owns freehold premises which, in terms of size and location, are suitable for the partnership’s business.
If the premises are to be used by the partnership, then it should be expressly agreed whether the premises are to become partnership property. This is because, if they do, they will become part of the assets of the partnership available for payment of creditors on any dissolution of the partnership. If the premises are to become partnership property then Susan could transfer them into the names of all three partners. This would constitute a contribution of capital to the partnership by Susan.
The partners inform you that they are going to name their business “The Wright Thompson Partnership”.
Section 1200 states that the disclosure requirements of chapter 2 of Part 41 CA 2006 only apply to partnerships carrying on business under a “business name”, that is, a name which does not include the names of all the partners. As this is the case here, there are additional publicity requirements which provide that all the partners’ names are disclosed on a range of prescribed business documents and at the firm’s place of business.