WHAT IS A PARTNERSHIP?

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​A partnership is a business structure that involves two or more persons going into business together with a view of making a profit.

In Trinidad and Tobago, partnerships are governed by the Partnership Act. 

Persons forming a partnership business usually enter into a partnership agreement which is often drawn up to avoid the implications of the Partnership Act - the agreement usually varies or excludes the duties, rights and interests of the partners which would otherwise exist because of the Act. The partnership agreement may be oral, written, or can even be implied from the parties’ conduct.

It should be noted that a partnership can be created between two or more individuals, between individuals and companies, as well as between two or more companies.

Before entering into a partnership it would be prudent to have a lawyer prepare a formal partnership agreement outlining:

• each partner’s role and level of authority
  
  
• each partner’s financial contribution
  
  
• a procedure for resolving disputes and
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• a procedure for ending or resigning from the partnership.

The advantages of a partnership:
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• It's easy to get started: 
  The partners can agree to create the partnership verbally or in writing (written agreements are always a better idea). Additionally, the paperwork and process involved in registering a partnership is simpler than incorporating a company.
  
  
• Ownership and control is combined:
  In a limited company, ownership and day to day management of the business is split between shareholders and directors (although they’re often the same people). That can mean that directors are constrained by shareholder preferences in pursuing what they see as the best interests of the business.
  
  By contrast, in a business partnership, the partners both own and control the business. As long as the partners can agree on how to operate and drive forward the partnership, they’re free to pursue that without interference from any shareholders. This can make a partnership business potentially more flexible than a company, with the ability to adapt more quickly to changing circumstances.
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• Access to knowledge, skills, experience and contacts:
  Each partner will bring their own knowledge, skills, experience and contacts to the business, potentially giving it a better chance of success than any of the partners trading individually.
  
  Partners can share tasks with each other, specialising in areas they’re best at and enjoy most. So if one partner has a financial background, they could focus on maintaining the company books, while another may have previously worked extensively in sales and therefore can take ownership of that side of the business. As a sole trader, by contrast, you’d have to do all of this yourself (or manage someone you employ to do some of it).​

• Better decision making:
  Compared with operating on your own, in a partnership the business benefits from the unique perspective brought by each partner. In business, very often two heads really are better than one, with the combined conclusion of debating a situation far better than what each partner could have achieved individually.
  
  
• More partners means more capital:
  The more partners there are, the more money there may be available from their combined resources to invest into the business, which can help to fuel growth. Together, their borrowing capacity is also likely to be greater than a sole trader. 
  
  
• Fewer statutory obligations: 
  A partnership has fewer statutory filing responsibilities than a company. A company has to file documents at the Companies' Registry any time certain changes occur in the company such as changes in directors or secretaries. Additionally, a company has to file annual returns every year. A partnership is not obligated to do any of this.
  
  
• Later on a partnership can become a company:
  ​Even if persons start as a partnership business it is possible for them to change the partnership business into a company if they choose to do so in the future.

The disadvantages of a partnership:

• There is unlimited liability:
  A partnership is not a separate legal entity. Therefore, when a business is operated as a partnership, its liabilities and debts are the partner's liabilities and debts - in other words, they are personally liable. If the business fails with debts to be paid, not only will the partners lose their income but they’d also have to pay the money owed from their own assets, whether or not they’re connected to the business. Because liability is unlimited, partners could lose personal assets such as their home as well as potentially face bankruptcy.
  
  
• Profits must be shared:
  While a sole trader retains all the profits of their business, those of a partnership are shared amongst the partners. By default, under section 26 of the Partnership Act, profits are shared equally, although that position can be amended by a partnership agreement.
  
  Sharing profits equitably can raise difficult questions. How do you value different partners’ respective skills? What happens when one partner is seen to be putting in less time and effort into the partnership, but still taking their share of the profits? It’s easy for resentment to occur if there doesn’t appear to be a fair balance between effort and reward.
  
  
• The actions of one partner may bind other partners: 
  Even the unauthorised action of one partner in the operation of the business, may bind other partners to third parties as the law regards each partner as agent of the others.
  
  
• A wrongful act or omission of one partner can cause the whole partnership to be liable. 
  Where any partner (with or without the authority of his co-partners) commits any wrongful act or omission in the business, and it results in loss or injury to any person who is not a partner in the firm, or any penalty is incurred, the firm is liable to the same extent as the partner who acted or omitted to act. 
  
  
• Slower more difficult decision making:
  Compared to running a business as a sole trader, decision-making can be slower as you’ll need to consult and discuss matters with your partners. Where you disagree, time will be spent negotiating to build agreement or consensus. Sometimes this might mean opportunities are missed. More often, it will frustrate a partner who has been used to making all the decisions for their business.
  
  
• There is potential for differences and conflict:
  Potential for disputes over profit sharing, administrative control and business direction can arise in a partnership as there are a number of owners, often with different perspectives and ideas, trying to make decisions together.
  
  
• Limited access to capital
  While a combination of partners is likely to be able to contribute more capital than a sole trader, a partnership will often still find it more difficult to raise money than a company.
  
  Banks may prefer the greater accounting transparency, separate legal personality and sense of permanence that a company provides. To the extent that a partnership business is seen as higher risk, a bank will either be unwilling to lend or will only do so on less generous terms.
  
  Several other forms of long-term finance are not available to partnerships. Most importantly, they cannot issue shares or other securities in exchange for investment in the way a company can.
  
  

​Important Notice: This post does not constitute or provide legal advice. Always consult with a suitably qualified attorney-at-law on any legal problem or issue.

Law For All is managed by the Aurora Chambers Legal Practice.

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