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”
There are three types of partnerships:
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:
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.
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.
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.
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.
Section 6(1) provides for a statement of particulars required to be delivered to Registrar:
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
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.
Key areas you will want to cover in your written partnership deed:
General Rule: unless otherwise provided, one partner one vote: or the voting rights will be proportionate to the amount of capital contributed.
* 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
* 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
* 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.’
* Partners are fiduciaries to each other
* Partners as agents of one another and the partnership
* Partners as owners and managers of the partnership
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.
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.
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.
Liability of partners
The partnership deed may contain rules that limit the extent to which one may be liable to debts.
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;
* 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
Upon dissolution the partnership firm stops trading. The following occurs:
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;