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If a Sole Trader wishes to expand their business, but does not have the financial resources to achieve said expansion individually, they may enter into a partnership with one, or more, other parties. Partnerships are defined in The Partnership Act, 1890 as
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a relation which subsists between persons carrying on business with common view to profit.
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The essential defining characteristic of a Partnership is that there has to be more than one owner / partner, and that these partners share responsibility for running the business. Unfortunately for the ex-Sole Trader they also have to share the profits. As with the Sole Trader there are no real legal formalities in setting up a partnership. However, as we shall see, it is in the interests of partners to draw up an agreement of how the partnership will operate, and what roles and responsibilities each partner shall take on, this agreement is referred to as a Deed of Partnership.
One of the best arguments for drafting a Deed of Partnership, is that within such a business each partner is said to be 'jointly and severely liable' for the acts and omissions of the other partners when they are acting on behalf of the business. This means that if one accountant in an Accountancy Partnership, makes a mistake in presenting the accounts of a business, and investors acting on those accounts lose large sums of money, they can sue not just that individual partner, but all the partners of the firm. Further if the firms debts are such that one partner can not have sufficient funds, the other partners are jointly and severely liable for those debts. Add to this the unincorporated status of Partnerships, which means that a partner can not limit their liability, and the potential for a partner to lose personal property, possessions and cash, due to the mistakes of another partner, is clear.
Thus the Deed of Partnership, whilst not reducing the effect of limited liability, at least establishes which activities each partner can be involved in, on behalf of the firm.
In addition, it is often the case that one partner may contribute more finance to the business than others, or work far greater hours than others in the Partnership. Under the Partnership Act profit would be shared equally between such partners, which one might consider unfair. A Deed of Partnership may also therefore stipulate the way in which profits are to be shared within the partnership.
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