A partnership is formed when two or more people agree to run a business together with a view to making a profit.
In the UK, partnerships are governed principally by the Partnership Act 1890 (PA 1890). The law provides that a partnership is legally formed when two or more persons carry on a business with a view to making a profit.
No further acts or formalities are required to consummate the partnership, although it is usually a good idea to record the key terms of the partnership in a written agreement (a Partnership Agreement), although there is no legal requirement for such agreement to be in writing. Typically, the partners will combine their resources and agree to the share the risks, profits and losses of the business between them.
Legal status of partnership
A partnership has no separate legal status. The Partners therefore have unlimited liability for the debts of the partnership. This means that if the partnership fails, creditors can pursue both the assets of the business and the personal assets of the partners themselves. The liability of the partners is therefore said to be joint and several, allowing a creditor to seek recovery of the full amount it is owned from either all of the partners jointly or any one partner severally.
In a partnership made up solely of individuals, the partners are taxed separately as self-employed individuals, paying income tax on their share of the profits of the partnership. Each partner must therefore register with HMRC for tax purposes.
If a partner dies or retires, they will usually be bought out by the remaining partners so that the partnership continues. If this is not contractually agreed, however, then the partnership will come to an end.