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The significance of being in a partnership

Posted: 22nd October 2018

A cursory glance through the ECC’s magazine and website highlights the number of members operating as a partnership and, indeed the ECC offers a “partnership” with organisations. However, what is a partnership and what does it mean for the partners in a partnership?

For a start, a partnership is legally defined as the relation which subsists between persons carrying on a business in common with a view of profit. No registration requirement is required to create a partnership. So long as the definition is satisfied then a partnership exists.

Crucially, partners in a partnership have joint and several liability for the debts and obligations of the partnership. Therefore picture the scenario – you’ve started a partnership with a friend to run a restaurant and your friend signs a lease of prestigious city centre premises and also ordered fancy state of the art kitchen equipment. Here, any one of the partners can be liable for the liability of the partnership to its creditors. Such liability is not proportionate either – if the kitchen equipment is say £100,000, then it does not mean that a partner’s liability to pay is only £50,000 but instead any partner is potentially liable for the full £100,000 to the supplier.

Let’s picture a different scenario of the business being an incredible success. The partners have respectively contributed £80,000 and £20,000 capital to the partnership and one would expect that their respective split of the business is automatically 80/20. However, the profits of a partnership are shared equally unless specified otherwise.

Therefore, if you are in a partnership or considering going into a partnership, then the partners should consider entering into a partnership agreement to specify the rights and obligations of each partner such as their right to the profits and also share of the losses and how decisions of the partnerships are taken.

Finally what about the partners of the ECC – if the ECC was to incur £10,000 of costs with a supplier, does this mean that one of its partners can be liable for this amount. Well, the partners can rest assured that the answer is very likely no. While they are called “partners” they do not fall within the legal definition of a partnership – parties who group together with a membership organisation for benefits are not carrying on a business together to make a profit (which is a pre-requisite requirement for there to be a partnership).

Stephen Chan, partner at Harper Macleod, specialises in partnership law and is the author of “A Practical Guide to Partnership Law in Scotland”.

Business Comment

Business Comment is the Edinburgh Chamber of Commerce’s bi-monthly magazine. It provides insight on Edinburgh’s vibrant business community, with features on the city’s key sectors, interviews with leading figures and news on new business developments in the capital.
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