Partnerships

Partnerships Introduction

  • A partnership is a contractual association where two or more people agree to do business together.
  • This unit covers the definition of a partnership, its legal nature, elements of a partnership agreement, and different types of partnerships.

Requirements for a Partnership

  • A partnership involves a legal relationship arising from a contract between two or more persons (usually not exceeding twenty).
  • Each person agrees to contribute to a common enterprise with the aim of making and sharing profits.
  • A valid partnership requires a valid agreement, and it must meet the following requirements:
    • Each partner must contribute to the partnership.
    • The partnership's business must be carried on for the joint benefit of all partners.
    • The business object must be to make a profit that is divided among the partners.
  • A minimum of two persons is required.
  • The maximum number of partners is generally restricted to twenty, with some exceptions.

Legal Nature of a Partnership

  • A partnership is a contractual association without a separate legal personality from its partners.
  • Partners are ultimately liable for the debts of the business.
  • During an ordinary partnership, partners are jointly liable; after dissolution, they become jointly and severally liable.
  • Joint and several liability means a creditor can sue any one or more of the former partners for the entire debt.
  • Instances where the law recognizes a partnership as an “entity”:
    • The rules of the High Court and Magistrates’ Courts allow a partnership to sue and be sued in the partnership name.
    • A partnership creditor who has obtained judgment against the partnership must first attach partnership assets before executing against the private estates of individual partners.
    • Under the Insolvency Act, Act 24 of 1936, partnership property is deemed a separate estate for insolvency proceedings.

The Partnership Agreement

  • A partnership is established by a contract that contains the requirements of a partnership and is entered into with the true intention of creating a partnership.
  • A partnership agreement must comply with all general requirements for contract validity.
  • No specific formalities are required; agreements can be written, oral, or tacit.
  • Parties may agree on certain formalities, which must be completed to establish the partnership.
  • The partnership agreement’s execution must be possible and lawful at the time of the agreement.
  • The business's conclusion and intended operation must not be prohibited by law or contrary to good morals or public policy.
  • An unlawful partnership is void. For example, a partnership dealing in unlicensed diamonds or establishing a brothel would be invalid.

Legislation affecting the lawfulness of a partnership

  • Section 35(1) of the Companies Act, Act No 28 of 2004, states that if a group of more than 20 persons wishes to do business together for profit, they must register as a company.
  • Section 35(2) allows the Minister of Trade and Industry to exempt organized professions from section 35(1), making professional partnerships with more than 20 partners legal.
  • Legislation can restrict the right of certain professionals to enter into partnerships. The Legal Practitioners Act, Act 15 of 1995, prohibits legal practitioners from partnering with non-admitted persons.

Contribution by Each Partner

  • Each partner must contribute something with commercial value, though precise valuation isn't necessary.
  • Contributions can be corporeal, incorporeal, expertise, or labor.
  • Movable or immovable property can be contributed, either in ownership or use.
  • The nature of contribution may vary among partners.
  • Ownership of contributed property generally transfers to the partnership unless otherwise agreed.
  • If ownership isn't transferred, the contribution must be placed at the disposal of the partnership.
  • The contribution must be subject to the risks of the business.
  • A party who demands their contribution back regardless of business success is considered a creditor, not a partner.

Joint Benefit of the Parties

  • The business must be conducted in the common interest of all partners. Each partner shares in the profits of the business.
  • A partnership doesn't exist if one “partner” receives all profits while others bear the losses.
  • The business need not be continuous; a joint venture in a single transaction can form a valid partnership.
  • More than one business can be carried on by the same partnership, and these businesses need not be of the same nature.
  • The business must be carried on in common, meaning each party is engaged as a principal, not merely as an agent or employee.
  • Parties may agree that a specific partner has the management responsibilities.

The Object of Making and Sharing a Profit

  • A partnership must intend to make a profit. Without profit as an object, associations like social or sports clubs are not governed by partnership law.
  • The business must be capable of making a profit, though it’s not required that profits actually ensue (a business making a loss is still a partnership).
  • Partners don't need to share profits equally, but each must have the hope of a share if the business is successful.
  • A partner can be given a conditional share in the profits, such as after certain projections have been met.
  • Partners can agree that one party gets an initial amount, with the remainder then shared.

The Intention to Establish a Partnership

  • Parties must have a clear intention to be partners. Without this intention, the agreement is valid but not a partnership.
  • Deary v Deputy Commissioner of Inland Revenue (1920 CPD 547): Determining a partnership involves looking at the real intention of the parties derived from the whole agreement, not just profit-sharing.
  • The presence of essential partnership requirements is prima facie proof of intent, but courts give effect to the real intention and won't recognize simulated intentions.
  • The party disputing the existence of a partnership must prove that the agreement discloses some other intention.
  • A court may find a partnership even if parties deny it or call their contract something else (e.g., lease).
  • Conversely, a court won't establish a partnership if it wasn't the real intention, even if the agreement is called a partnership.
  • Parties don't necessarily need to be subjectively aware that their contract creates a partnership. If they intend to establish something that is legally a partnership, a partnership exists, even if they didn't know this was the legal consequence.
  • Example: Students contributing money to buy sandwich ingredients, making sandwiches together, selling them, and splitting profits form a partnership, even if they didn't realize it at the time.

The Partnership Fund

  • Despite not having legal personality, the partnership fund (property or assets) has a distinct role in law, especially regarding partnership creditors.
  • Generally, unless partners intend otherwise, the fund comprises:
    1. Property originally contributed by the partners.
    2. Property acquired with partnership funds during the partnership.
    3. Profits made by the partners.
    4. Loans obtained by the partners for partnership purposes.
    5. The goodwill of a partnership business.
    6. All property used by the partnership if necessary for its proper functioning.

The formation of the partnership fund

  • Determining whether an asset is part of the partnership fund impacts creditors’ rights and partners’ rights over partnership property.

The situation between partners

  • Between partners, the partnership fund includes all assets the partners intend to be partnership property, regardless of joint ownership.
  • A mere agreement among partners is sufficient for creating the fund, irrespective of actual transfer.
  • Movable property acquired by a partner becomes joint property if the partner acted as the partnership's agent.
  • Property acquired in a partner’s name only becomes joint property upon delivery to the partnership.

The situation between the partners and third parties

  • What partners consider a partnership asset isn't sufficient to make it so for third parties. Individual items must be transferred according to the law.
  • Corporeal movables must be delivered, immovable property must be registered in the Deeds Registry, and incorporeal property (rights) must be ceded to the partnership.

The extent of each partner’s share

  • Unless otherwise agreed, partners are joint owners of partnership assets with an undivided share before termination.
  • The size of a member's share is only theoretically important during the existence of the partnership.
  • No partner can treat any particular asset as their own, nor are they entitled to a specific portion of the assets.
  • The size of each partner's share is determined by agreement. Without a specific agreement, the proportion in which partners share profits determines the extent of their share in the fund.
  • The assets are usually sold during liquidation, and the remaining cash is distributed among partners.

Types of Partnerships

  • Focus on ordinary and extraordinary partnerships.

Extraordinary and ordinary partnerships

  • Differ in liability for debts.
  • In an ordinary partnership, all partners work together to make a profit and are liable for debts (joint co-debtors during existence, jointly and severally after dissolution).
  • In extraordinary partnerships, one or more partners (extraordinary partners) are not liable to third parties for debts, provided they don't act or are held out as ordinary partners.
  • Publicity does not affect the protection of the extraordinary partner; outsiders knowing the nature and terms of the partnership doesn't render them liable to creditors.
  • Two types of extra-ordinary partnerships:
    • silent or anonymous partnerships
    • partnerships en commandite.
  • A commanditarian partner and a silent partner may not participate actively in the business of the partnership and are not liable for partnership debts to creditors of the partnership, but only to their co-partners. They differ, however, with regard to the extent of their liability towards their co-partners.

Silent partnerships

  • Created when parties agree to share profits of a business carried out by one or some partners in their name alone, while others remain silent or anonymous (sleeping or dormant partners).
  • The silent partner shares the risk and is liable to co-partners for their share of losses but isn't liable to third parties, provided they don't actively participate.

Partnerships en commandite

  • Carried on in the name of one or some partners, while others (commanditarian partners or partners en commandite) are protected against liability to third parties.
  • The partner whose name isn't disclosed contributes a fixed sum and receives a fixed share of profits.
  • In case of loss, they're only liable to other partners up to their agreed capital contribution.
  • The important difference between partnership en commandite and a silent partnership is that a silent partner is liable to his/her partners for his/her pro rata share of all partnership debts, whereas the liability of the commanditarian partner is limited to the amount of his/her agreed capital contribution.