This month we look at partnership structures — an enduring yet often misunderstood form of business association. According to the latest UK business population data, there were approximately 160,000 partnerships registered for VAT/PAYE out of 2.73 million active businesses, with partnerships accounting for around 6 % of the total private sector business population. These figures underscore both the continued relevance of partnerships and the importance of clear legal frameworks to govern them.

The Legal Landscape

Partnerships in England and Wales are primarily governed by the Partnership Act 1890 (“the 1890 Act”), together with relevant case law. Section 1 of the Act defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”.

A partnership may arise without any written agreement, whether by oral agreement or by conduct. The House of Lords’ decision in Khan v Miah [2000] 1 WLR 2123 confirms that the question of whether a partnership exists is one of fact, turning on the parties’ intentions as objectively assessed, and that preparatory activities may be relevant in determining when a partnership relationship comes into existence.

Unlike limited liability partnerships (LLPs) or companies, a general partnership has no separate legal personality, and partners are jointly and severally liable for the debts and obligations of the firm.

Although the 1890 Act provides default rules governing profit-sharing, decision-making, partnership property and dissolution, these provisions are often ill-suited to modern business arrangements. In Stekel v Ellice [1973] 1 WLR 191, the court illustrated how reliance on the statutory defaults—particularly in relation to management participation and remuneration—can lead to outcomes that do not reflect the parties’ commercial intentions.

Types of Partnerships in UK law

• General partnerships governed by the Partnership Act 1890

• Limited partnerships under the Limited Partnerships Act 1907

• Limited liability partnerships (LLPs) governed by the Limited Liability Partnerships Act 2000 (LLP Act 2000)

Selecting the appropriate structure and documenting it correctly is a critical step in managing legal and commercial risk.

Common Pitfalls & Practical Recommendations

1. Lack of a Written Agreement

Without a written agreement, partners are wholly reliant on the default provisions of the 1890 Act. Khan v Miah demonstrates the evidential and legal difficulties that can arise where the existence, scope or timing of a partnership must be inferred from conduct rather than express agreement. A comprehensive written partnership agreement should therefore always be put in place to provide certainty.

2. Unclear Profit-Sharing Arrangements

In the absence of agreement, profits and losses are shared equally, irrespective of capital contribution. This principle has long been established, including in Const v Harris (1824) Turn & R 496, and remains reflected in the default statutory regime. In Pathirana v Pathirana [1967] 1 AC 233, the Privy Council was required to determine partners’ respective entitlements in circumstances where financial arrangements were inadequately defined, illustrating the scope for dispute where profit-sharing terms lack clarity.

3. Inadequate Dispute Resolution Mechanisms

Agreements should include structured dispute resolution procedures, such as escalation clauses, mediation and, where appropriate, arbitration. The operation of the Arbitration Act 1996 demonstrates how agreed arbitration mechanisms can provide a more efficient means of resolving commercial disputes. Although not a partnership case, Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 reflects the courts’ general encouragement of alternative dispute resolution, a principle frequently applied in partnership litigation.

4. Lack of Exit Strategies

The 1890 Act permits dissolution in circumstances that may be commercially undesirable. Where exit arrangements are not clearly defined, dissolution may be the only remedy available. While Const v Harris illustrates the rigidity of default partnership outcomes, the decision in Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426—though a company case—is often cited by analogy for the commercial deadlock that can arise where parties fall out and no effective exit or resolution mechanism exists.

5. Insufficient Attention to Intellectual Property

Intellectual property created in the course of a partnership may be treated as partnership property unless the parties agree otherwise. The importance of clear allocation is illustrated by Fisher v Brooker [2009] UKHL 41, where the House of Lords considered copyright ownership in collaboratively created works, and Beckingham v Hodgens [2003] EWCA Civ 143, which demonstrates how disputes may arise where contributions to intellectual property are not governed by clear contractual terms.

6. Unclear Asset Ownership and Partnership Property

Sections 20–21 of the 1890 Act govern partnership property. Property acquired with partnership funds is presumed to be partnership property and must be applied exclusively for partnership purposes. These statutory presumptions frequently conflict with parties’ commercial assumptions and should be expressly addressed.

7. Overlooking Regulatory Compliance

Partnership agreements should include provisions addressing compliance with applicable regulatory, licensing and tax requirements. Regulatory enforcement actions—such as Financial Conduct Authority enforcement decisions and disciplinary proceedings demonstrate how failures in compliance structures can expose all partners to regulatory and reputational consequences.

Conclusion

A well-drafted partnership agreement is fundamental to managing risk, allocating responsibility and ensuring commercial certainty. Given the limitations of the 1890 Act, reliance on default statutory provisions is rarely appropriate for modern business arrangements. Bespoke drafting, tailored to the partners’ specific objectives and risk profile, is therefore strongly recommended.

Partnership agreements should, accordingly, be treated as living documents and reviewed regularly. Review is advisable where there is a change in partnership composition, significant business growth or contraction, a shift in business activities or markets or a relevant legislative or regulatory change. Even in the absence of such triggers, a document review every three to five years is considered good practice.

If you would like advice on drafting, reviewing, negotiating and/or updating a partnership agreement, or on managing partnership disputes and exits, please contact us today. We would be pleased to discuss your circumstances and provide tailored advice appropriate to your business and objectives.

This article provides general information only and should not be construed as a substitute for advice based on a detailed review of your particular circumstances.