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Employment Law > Partnership Law

Partnership Law

Employment Solicitor Martin Malone discusses the potentially tricky area of partnership law in the context of employment

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In a modern business context, many people regard the conduct of business through the medium of partnership as something of an anachronism.

What is a Partnership?

A partnership need not be declared as such in order to exist. It arises whenever more than one person is carrying on business with another or others with a view to profit. Very often in the context of new start and small businesses a partnership can therefore be deemed to exist even though perhaps not intended.

The conventional model for a Professional Partnership

Partnerships also remain popular in the professions. Until fairly recently it was not possible to conduct many professional businesses through the medium of a limited company so that partnerships were a necessity. The conventional model provides for a number of equity partners who are in effect the owners of the business and perhaps also salaried partners who have the status of partner but do not own a stake in the business. In recent years a trend has developed for salaried partners to be provided with a share of profits (normally from an allocated fund for this purpose) as well as taking a fixed salary.

Potential Drawbacks

From an employment law perspective one of the obvious drawbacks for salaried partners is that they are "held out to the world" as partners in the business and it is unusual in this context for a distinction to be drawn between equity and salaried partners. As such, the salaried partners assume joint and several liability with all the other partners in the business for all business liabilities and without limit. As recent events have shown, this obligation can prove to be very onerous indeed. Bearing in mind the exposure to personal liability it is often suggested that salaried partners should obtain an indemnity from the equity partners in respect of potential personal liability. However, it is worth bearing in mind that in the event of business failure the equity partners are likely to be exposed to significant personal claims so that such indemnities will probably be of very limited if any benefit.

Alternatives to Conventional Partnerships

So, given all these drawbacks, why would anyone want to become a salaried partner? For many, particularly in the professions, the status of the position is a material factor. Salaried partnership can also be regarded as a necessary step in terms of career progression, particularly if the individual concerned wishes to secure an equity stake in the business. Nonetheless, the exposure to personal liability is, quite properly, a major concern for many who are offered partnership and it has been seen recently that the traditional professions (including in particular solicitors) are not the "safe bets" that they were once considered to be. However, the alternatives do not necessarily offer any greater security. There has emerged over the last decade or so a kind of hybrid in the form of limited liability partnerships. In the legal sector, banks were initially willing to extend major facilities to these LLPs.

However, the recent downturn has caused a number of major banks to burn their fingers as a result so that it is now standard practice for members of an LLP (the equivalent of partners) to be required to provide personal guarantees. While these might not provide quite the same extent of exposure as traditional partnership, nonetheless in the event of financial difficulty the business's bank is likely to be the major creditor and it is also likely that claims could be made under the guarantee at a fairly early stage.

Some professions have turned to the model of a limited company, not least because of the tax advantages this can bring. However, the spectre of personal liability remains because, even more so than with LLPs, banks now require personal guarantees from directors and shareholders as a matter of course.

Advice on Partnerships

For professionals, entering into any form of partnership agreement is among the most important business decisions they will make in their lives. It never ceases to surprise me how many partners have very little understanding of their rights and obligations and how may are willing to sign such an agreement without having obtained legal advice. Such agreements can be at least if not more important than signing a contract to buy a house but few would proceed with the latter without having obtained professional advice.

It is natural for employees who are keen to succeed to be excited about the prospect of taking partnership. However, offers of partnership are more than likely to emphasise the positive aspects and to gloss over the potential drawbacks. At Canter Levin & Berg we have a great deal of experience in advising people who are considering joining or leaving a partnership as well as dealing with issues which can arise in the course of participation in a partnership. Our experience is enhanced by the fact that we also act for a number of businesses in preparing partnership agreements and dealing with the disputes in partnership which inevitably arise from time to time.

For expert employment advice on Partnership issues talk to Canter Levin & Berg

As specialist employment solicitors, we have a great deal of experience providing expert advice to people who have been offered partnership in a business, allowing them to make a decision based on a sound understanding of the benefits and liabilities involved. If you have an issue regarding an offer of partnership, call us now on 0151 239 1000 or fill in an enquiry form on our website and one of our Employment Solicitors will call you back. Our Solicitors offer free initial telephone consultations of up to 10 minutes, or longer face to face consultations at our Liverpool offices with prices starting from £100 for 30 minutes, inclusive of VAT.