Partnerships

Partnership

Section 2 of the Partnerships Act, 2012 defines a partnership as “… the relationship which exists between persons who carry on business in common with a view to making profit”

Types:

There are three types of partnerships:

  1. General/ordinary partnership
  2. Limited partnership
  3. Limited liability partnerships

1. General Partnership

It is created by default. Unlike a corporation, there is no need to file any documents with the state to make your business a partnership. A general partnership has general partners.

Unless the partners have a partnership agreement stating otherwise, each partner will have:

  • the ability to actively manage or control the business.
  • equal authority to make decisions about how the business will be run
  • equal authority to make legally binding decisions.

Partners have no limit on their responsibility for the debts of the business – the partner could lose more than his investment in the business; if necessary, personal assets will be used to pay business debts.

Each partner in a general partnership “jointly and severally” liable for debts of the business – each partner is equally liable for the debts of the business, but each is also totally liable. 

If a creditor fails to get what he is owed by one partner, he can get it from another partner, even if that partner has already paid his share of the debt. 

2. Limited Partnership 

It requires a partnership agreement.  Some information about the business and the partners must be filed with the Registrar (S68). It has both limited and general partners. The tradeoff for limited liability is a lack of management control; A limited partner does not have the authority to run the business and is like an investor in the business. 

A limited partner does not have total responsibility for the debts of the partnership. Liability limited to value of capital invested. The most a limited partner can lose is his investment in the business. 

3. Limited liability partnership

It is governed by the Limited Liability Partnership Act Chapter 30A, passed on 16 March 2012. The regulations requisite to facilitate registration of LLPs were published in September 2012

An LLP combines some of the features of a traditional partnership (e.g. flexibility) with the Limited Liability benefits more typically hitherto only associated with Companies.  

LLPs introduced to give professional services firms e.g. accountants, lawyers, surveyors etc the opportunity to benefit from limited liability e.g. by protecting their personal assets from any potential business creditors.

Many professional partnerships in Kenya have chosen to convert to LLP. It is not required that an LLP creates a constitution/Memorandum or Articles of Association.

However the Partners to an LLP would (under the Act) execute a Limited Liability Partnership Agreement to set out the agreement e.g. on profit sharing, capital contributions, roles/duties, management or other arrangements amongst themselves and change those arrangements as often as they agree.

Some feature include being a body corporate, a body sui generis (of its own kind) and it is a separate and distinct legal entity from its partners.it is a hybrid between a partnership and a limited liability company.

NB: The first two are governed by the Partnerships Act, the third one by Limited Liability Partnerships Act.

Features of general and limited partnerships and LLPs

  1. All partnerships must have more than two members
  2. Should be governed by partnership deed
  3. Drafting of partnership deed is meant to provide rules of governance, management and control of partnership but it is not mandatory that it should be governed by partnership deed; they can governed by first schedule of Partnership Act and LLP Act.
  4. General and limited partnerships are registered under Registration of Business Names Act. Limited liability Partnerships are registered under their own Act.
  5. In general partnerships, all partners are involved in management and control while in Limited it is delegated to a partner(s) called a general partner(s).
  6. Liability for all losses in general partnerships accrues to all partners without limitations but in limited p, liability of certain partners can be limited to capital contributed provided that every limited p. must have a general partner whose liability is unlimited.

DISTINGUISHING FEATURES BETWEEN A GENERAL PARTNERSHIP AND A LIMITED PARTNERSHIP

  • All partnerships must have at least two members partnerships are to be governed by a partnership deed, the drafting of which is meant to provide the rules of governance, management and control.
  • General partnerships and limited partnerships are registered under the Business Names Act. LLPs are registered under the LLP Act.
  •  In general (ordinary) partnerships, all the partners are involved in the management and control of the business. In Limited partnerships, the management and control is delegated to a number of partners called general partners
  • The liability or all the losses in a general accrues to all the partners without limitation. In a limited partnership, the liability of certain partners can be limited to the capital they have contributed provided that every limited partnership must have at least one partner (general partner) whose liability is unlimited.

REGISTRATION AND COMPLIANCE

Registration of Partnerships

Registration of the proposed business name must be in accordance with the Registration of Business Names Act, revised 2006. Once formed and registered, a partnership may carry out business under its firm name notwithstanding lack of legal personality.

  1. Name- name or style under which any business is carried on
  2. Firm- an unincorporated body of two or more individuals, or of one or more individuals and one or more corporations, or of two or more corporations, who or which have entered into partnership with one another with a view to carrying on business for profit

Section 6(1) provides for a statement of particulars required to be delivered to Registrar:

  • Business name proposed to be registered
  • General nature of proposed business
  • Full address of principal place of business and postal address of firm, individual or corporation
  • Full address of every other place of business 
  • In case of a firm, personal details of individuals who are partners and corporate name of every corporation which is a partner 
  • Date of commencement of the business 

Section 17- prohibited business names; names containing names which mislead the public as to nationality race or religion of owners; words like presidential, government, municipal; co- operative or its equivalent; names identical to existing business or corporation; or which in the opinion of the Registrar are undesirable 

PARTNERSHIP DEED FOR A GENERAL PARTNERSHIP AND AN LLP

The terms on which the firm is established and managed may be formalized into a legally binding partnership agreement contained in a deed or articles of partnership.

Characteristics include:

  • It must be agreed upon by partners
  • It must meet requirements of contract.
  • It requires a recital, which is an agreement to be bound.
  • It must state the business of partnership is for a legitimate purpose and there are no vitiating factors.
  • The contract must be executed
  • State date of commencing partnership; if time bound, state when it will end
  • Includes a proper cover page to identify it as a partnership agreement
  • Must have the parties clause that lists all partners OR ‘this partnership agreement is made between the parties whose particulars are provided in the first schedule’

Key areas you will want to cover in your written partnership deed:

  1. Basics of Partnership: What is the name of the partnership?
  2. What is the purpose of the partnership?
  3. What is the duration of the partnership?
  4. Responsibilities, performance and remuneration. What is each partner’s role?
  5. What are each partner’s responsibilities within the company, and what level of performance is expected?
  6. Are partners expected to make a full-time commitment to the venture, or are business activities permitted?
  7. What will be the income of each partner, and how will profits or losses be distributed?
  8. Contributions of partners; What will each partner be contributing to the partnership in terms of cash, assets, loans, investments, and/or labor?
  9. If a partner loans the company money, what will be the terms or repayment?
  10. Will the partners be expected to make additional contributions to the partnership, and if so, how will that be handled?
  11. Withdrawal of partners/admission of new partners; What guidelines should be followed if one partner wants to leave the partnership?
  12. Will partners be allowed to sell their interests in the business to outsiders?
  13. On what grounds can a partner be expelled from the partnership (misconduct, non-performance of duties)?
  14. How will new partners be admitted to the partnership?
  15. Buy-out procedures; What guidelines should be followed if one partner wants to retire or leave the partnership?
  16. What happens if a partner is incapacitated or dies?
  17. Will the partnership take out life insurance to ensure the surviving partner is able to buy the deceased partner’s shares from his/her heirs?
  18. Will partners who leave have to sign a non-compete agreement?
  19. Dispute resolution; What methods will be used to settle disputes that can’t be otherwise resolved?
  20. What procedures should be used in the event of a tie vote between partners on crucial partnership decisions?
  21. Will you use mediation or binding arbitration?
  22. If disputes can’t be resolved, is there a mechanism in place for dissolving the partnership?
  23. Financial arrangements; What banking arrangements will be made for the partnership?
  24. Which partners will have cheque signing privileges?
  25. Who will be authorized to draw on the partnership’s accounts?
  26. How will the books be kept?
  27. Method for dissolving the partnership; When can the partnership be dissolved?
  28. What happens to the partnership if the partners decide they can’t work together?
  29. Valuation; What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?

REQUIREMENTS OF A PARTNERSHIP DEED

  1. Must meet all the formal requirements of  a valid contract:
  2. Capacity
  3. Intention to be legally bound: should form the recitals
  4. Consideration: mutual obligations to be involved in the partnership
  5. Legitimate, lawful purpose
  6. Absence of vitiating factors, no duress
  7. Must be executed
  8. Certainty: when the partnership commences and when it ends
  1. Have an appropriate cover page
  2. Must have the parties’ clause: either list all the partners; general rule is that all parties cannot be body corporates, partnerships can be between individuals and companies or between individuals.
  3. Recitals: intentions to be bound
  4. Clauses:
  5. Business of the partnership clause, should be legal
  6. Capital of the partnership; total capital and the individual contributions
  7. Management clause: 
  8. Meetings of the partners
  9. Manner in which meetings will be convened
  10. Where the meetings will be held
  11. Who will preside over the meetings
  12. How will partners be engaged in the day to day management of the business (will there be a managing partner)
  13. Employment of other officers and staff of the business

General Rule: unless otherwise provided, one partner one vote: or the voting rights will be proportionate to the amount of capital contributed.

  • Partnership accounts and records: all partners are entitled to free access to all partnership records and accounts.
  • Provide the type of accounting or financial statements to be prepared, and what they consist of
  • Audit of the records
  • Where the records of the partnership will be kept
  • Access: how will be records be availed for the partners
  • Partnership property (however rebuttable presumptions at law)
  • All property that has been brought into the partnership for the purposes of carrying out the partnership business.
  • Property acquired in the course of business of the partnership.
  • Any property acquired on behalf of the partnership
  • Any other property that otherwise devolves to the partnership
  • Partners’ obligations
  • Partners as fiduciaries to each other
  • Partners as agents of one another and of the partnership
  • Partners as owners
  1. Duty to act within powers
  2. Partners owe each other and to the partnership a fiduciary duty to act in good faith
  3. Duty of acting in the best interests
  4. Not to cause harm
  5. To promote the business/interests of the partnership
  6. Duty of disclosure: an absolute duty to make disclosures to each other and to the partnership. Disclose any matter which is material (with a huge impact) on the partnership, on the partner and on the business of the partnership
  7. To be frank
  8. To complete
  9. Act within reasonable time
  10. Duty to devote time and effort in pursuing the business of the partnership.
  11. Duty of no conflict of interest: (legal concept, not a moral question)
  12. Not to engage in similar and competing business
  13. Not to promote similar and competing business
  14. Not to make secret profits from the partnership
  15. Not to make benefits at individual levels which are competing or are not in the best interest of the partnership

Important Clauses to include in a partnership deed:

  • Business of the partnership clause
  • Capital of partnership– total capital and contribution of each individual
  • Management clause

* Meetings of partners- when (how often), how they will be convened, where will they be held, who will preside over the meetings 

* How partners will engage in day-to-day business- all or some?

* How partnership will employ people

  • Voting: Unless specified otherwise, it is one partner, one vote; or voting rights can be proportional to capital contributed
  • Partnership accounts and records– general rule under the Partnership Act is that all partners are entitled to free, unfettered access to all partnership records

* Provide type of accounts/ financial statements to be prepared- e.g. partnership can cause to be prepared annual financial statements; or quarterly

* Provide for audits of those accounts- auditors 

* Provide where records of partnership will be kept

* Access e.g. circulate records to members every financial year 

  • Partnership property– under Act and common law, property consists of;

* All property that has been brought into business of partnership for purpose of carrying on partnership business 

* Property acquired in the course of the business of partnership

(Rebuttable presumptions at law- can be shown that a property was not acquired in the course of business)

* Property acquired on behalf of partnership

* Any other property that otherwise devolves to the partnership

Vis a vis property of predominantly personal use- e.g. gifts that a partnership give a partner- ‘without prejudice to the foregoing, the following property will not be deemed to be personal property- property partner has bought with own money, etc.’

  • Obligations of partners;

* Partners are fiduciaries to each other

* Partners as agents of one another and the partnership

* Partners as owners and managers of the partnership 

  • Membership clause

Contains how people become partners and how they cease to be partners. New partners sign a deed of adherence. This is a document that shows that a new partner has agreed to comply with the partnership deed.

Partnership contracts

This includes the powers that partners have to bind a partnership

Under the Act, the general rule is that all partners have the authority to bind the partnership. Third parties are not required to inquire as to the authority of the partner to bind the partnership. 

* Partnership agreement for limited partners will provide that only general partner can execute partnership on behalf of partnership.

* Pecuniary limit for contract to be signed- you can provide different amounts; one partner for 200,000, two or more for 1M and 10M by all partners etc. 

* Period of authority

Goes to the root of the powers partners may have to bind the partnership. As a general rule, all partners have authority to bind the partnership. A contract signed on behalf of the partnership is deemed to bind the business and other partners.

Third parties are not required to enquire as to the authority of partners to bind the partnership.

Rebuttable where third party:

  1. was aware that there was no such power
  2. ought to be aware of such authority
  3. if the contract is not supported by adequate consideration

When a third party bona fide has entered into a contract with a partnership, which contract was signed by a partner who does not have authority to sign the contract, the contract is enforceable by the third party against the partnership and the business, and the only recourse by the other partners and the partnership is to seek compensation from the partner acting in excess of their authority.

Partners are entitled to provide, in the partnership agreement, limitations on the authority of partners to bind the business.  Partnership agreement for limited partners will provide that only general partners can execute contract.

  • Who can execute a contract
  • Pecuniary limits
  • Period of authority

Liability of partners

  1. All partners are liable to the debts of the partnership
  2. The liability extends when one has ceased to be a partner:
  3. The liability accrues within 12 months of one ceasing to be partner
  4. The partner has not given any public notice that he has ceased to be partner, he will continue to be liable for partnership debts
  5. The partner has not contributed to his comital capital contribution to the partnership business or partnership current account overdrawn.

The partnership deed may contain rules that limit the extent to which one may be liable to debts.

DISSOLUTION OF PARTNERSHIP:

Partnerships do change when a partner leaves and they do change when a partner joins. However for accounting purposes, we only consider partnership as changing sufficiently to merit treatingv them as ceasing to exist when the partners go their separate ways. Partnerships can end in the following ways;

  1. A partnership formed for a particular purpose terminates when that purpose has been fulfilled 
    1. When there is a specific time period stipulated for the existence of the partnership
    1. Upon agreement by all the partners
    1. If there are only two partners and one partner resigns or dies, the partnership automatically terminates
    1. By order of the court; e.g.;

* If partnership is registered for illegal or improper purpose

* On application by the Registrar based on reasonable opinion that the partnership is dormant

* Where there is a breach of obligations by partners

– Registrar can on reasonable grounds dissolve a partnership

Consequences of dissolution

Upon dissolution the partnership firm stops trading. The following occurs:

  • The assets are disposed of
  • The liabilities of the business to everyone other than partners are paid
  • The partners are repaid their advances and current balances- advances are the amounts they have put in above and beyond the capital.
  • The partners are paid the final amounts due to them on their capital accounts

Any profit or loss on dissolution would be shared by all the partners in their profit and loss sharing ratios. Profits would increase capitals repayable to partners. Losses would reduce the capitals repayable. If a partner’s final balance on the capital and current accounts is in deficit, they will have to pay that amount into the partnership bank account.

Where a partnership is dissolved as a consequence of winding up i.e. being insolvent, the provisions of the Insolvency Act will determine how the assets will be distributed.

In other cases, where partnership is being dissolved the assets (partnership property) will be broadly distributed as follows;

  1. Partnership will be required to pay its tax obligations
  2. Paying rates and other charges to local authority or national government 
  3. Employee salaries
  4. Partnership creditors
  5. Residue/surplus will be distributed pro rata based on the capital contributed by individual partners to the partnership
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Silvana
Silvana
Silvana & Associates Advocates is a premier medium-sized law firm established in 2014 and based in the Metropolitan City of Nairobi. We offer Corporate and Commercial Law services.
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