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:

1. Direct investment by a partner
2. Allotment of shares in the partnership to partners
3. Loan by a partner
4. Allotment of shares in the partnership to third parties
5. 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.