INTRODUCTION

Partnership can simply be referred to as a business organization set up by and between two or more people for the purpose of making profits. In partnership generally, the partners are involved in the management and running of the business activities. They are also entitled to profits and liable to risks or losses resulting from the partnership.Partnerships are different from incorporated companies. Though both business entities can be legally registered, formed by two or more persons, and regulated by the legal framework of a country, a partnership does not have a separate legal personality also known as corporate personality. This means that the business is not distinct from the partners in the eyes of the law and the partners can be held liable for the business failures.There are types of partnerships which include general partnership, nominal partnership and so on. . There are two types of general partnerships: unlimited and limited. However, this paper will concentrate basically on the unlimited partnership which is a kind of general partnership. Like all partnerships, an unlimited partnership may be regulated (powers, duties, profit percentages, equity holdings of partners, etc) by a Memorandum of Partnership.

This paper will examine the definition and core features of an unlimited partnership, the conditions an enterprise must fulfill to qualify to be registered and called an unlimited partnership. Lastly, it will provide a classical case study on the subject, questions and solutions in relation to the case study to provide a better understanding of the topic.

 

 

 

 

DEFINITION

An unlimited partnership is a business entity with at least two persons which pool together resources, runs its business activities or the management of its assets or resources and being jointly and severally liable for its debts.

An unlimited partnership is a legal entity binding two or more business partners in responsibility and liability for their business and in the event of debts incurred by the business which overrides the assets, the partners will be held liable. Put in simpler terms, unlimited partners are personally and equally liable for the debts of the partnership business upon insolvency. In an unlimited general partnership, all partners in the business are equally responsible for the debts and other liabilities incurred by the business, and they are all involved in its operations. In limited partnerships, individuals partner together and share in its profits, but are not responsible for daily business activities and do not share in the business’s liabilities. Unlimited partnerships are different from unlimited companies. Unlimited companies have a corporate or legal personality but an unlimited partnership does not.’

An unlimited partnership is set up by a simple registration, no minimum capital requirement and simple structure of the business with much less formalities.

Unlimited liability allows creditors to attach and seize personal assets to satisfy business financial obligations and/or debt. This is shared by all owners regardless of the amount they have individually invested.

 

 

CONDITIONS TO BE AN UNLIMITED PARTERSHIP

There are no strict formalities to the creation of unlimited partnership but there are a few basic conditions to be met to qualify as an unlimited partnership.

  • Number of Partners: This is probably the most basic and core feature of any partnership. An individual cannot form a partnership. There must be at least two people who are willing to pool their resources together and intention to share profits and losses. It should be noted that some countries restrict partnership maximum number to 20 except accounting and legal practitioners partnership.
  • Unrestricted Liability: The intending partners must agree to have unlimited liability in the business entity and to be jointly and severally liable in the case of insolvency. Their liability cannot thus, be restricted in the Memorandum, if any.
  • Age: The partners must have at least two partners who have reached the majority age has defined by the laws of the country to qualify for an unlimited partnership.
  • Profit-Making: As a general legal principle, partnerships are not allowed to be charity organizations. Therefore, it must be formed for the intention to make profits.

 

 

 

 

 

 

CASE STUDY

Tony, ElieandFuzi have been running a restaurant in Hamra, known as Meat the Bun. They have always saved up money in a small safe in their shop. However, recent strings of thefts led them to go to a bank to request for an account. They were advised to first register their business. The trio borrowed money from the bank to operate their restaurant in Bliss Street – Beirut.

The restaurant was doing well and all profits were equally distributed over the three partners. Later on, after the launching period, another big restaurant was set up by a very rich business man who just came back from Italy and hired a French Chef. Meat the Bun restaurant began to have a string of bad performances and low turn over as they lost many customers. New consumers who actually tried the restaurant were not converted into frequent consumers, with time the restaurant was not breaking even, and accordingly the loses were also divided equally among the partners.

While Tony traveled to India to learn a new recipe and Fuzi traveled back home to bury his aged uncle, Elia made a desperate decision to save their business. She mortgaged the building which they initially bought for the business for another loan and hired a German Chef whom she could only pay for two months after entering a contract of employment with her for two years. The German Chef has now sued for his balance and compensation after she fired him without notice or cause.

Unfortunately, the restaurant was not able to survive their initial losses.Tony and Fuzi returned and they all jointly announced Meat the Bun’s bankruptcy a year after registration and the three partners were liable to pay the loan back to the bank, the mortgage sum or forfeit the building and the compensation awarded by the court in favor of the German Chef.

The case of unlimited partnership was reflected in this case as the profits, loses, shares, and benefits were equally distributed over the partners.

Unlimited partnership is the partnership between different persons when they hold the same liability and this was the case of Meat the Bun.

 

 

 

QUESTIONS AND ANSWERS

  1. What type of business organization was set up?
  2. Would you have suggested the incorporation of a limited liability company? Give reasons for your answer.
  3. Advise them on the consequences of Elia’s actions.
  4. With an illustration from the above facts, advise them on how they can carry on an unlimited partnership without having to register it. What are the practical challenges for dispensing with registration?
  5. How would you regard their liabilities as regards the partnership?
  6. Do you think unlimited partnership is fair?
  7. What will they have required to regulate profits sharing assuming they invested different sums?
  8. What will have been the solution if the profits were not equally distributed?
  9. How broad and complex is the agenda?
  10. What history precedes this partnership, and how can we deal with that from the beginning
  11. Would Tony and Fuzi be held personally and jointly liable for the actions of Elia in their absence?
  12. How can they successfully dissolve the unlimited partnership?
  13. Can the bank attach their personal properties for judgment debt settlement?
  14. Will the losses be shared equally?
  15. To what extent is their unlimited liability in this kind of partnership?

 

ANSWERS:

  1. In this scenario, there are three people interested in forming a small business they want to run themselves and be entitled to all benefits and run all the risks. Essentially, they did not want anything changed in the former structure and less formalities.

This business set up isan Unlimited Partnership.

  1. No, they do not need to incorporate a limited liability company

Reasons:

A limited liability company requires much formalities

There are higher taxes charged

It requires much funds to incorporate and keep afloat

Much bureaucracy in administration

Lack of privacy due to required submission of documents related to business annually

  1. Under unlimited partnership, whatever any of the partners do on behalf of the partnership is binding on all partners. There is collective responsibility for individual decisions and actions taken in the course of business.

In this scenario, Elia obtained a mortgage loan in respect of their building so as to expand the business and hire a German chef to compete with their rivals. This action is binding upon all the partners whether they were present or not.

Thus, in the event of failure to repay the mortgage loan, and fulfill all the contractual obligations to the Chef, they will all be held equally liable for the consequences and would forfeit the building put forward as security for the loan.

  1. They can dispense with registration if they are not interested in entering any legal contract or dealing as a business set up but as individuals.

Challenges:

Lack of capacity to create binding contracts

Lack of capacity to operate as a single business unit such as opening account as a business

  1. Since there is no registered document to regulate the profits and losses of the Partnership, the liabilities of the Partnership are equal and extend to their personal properties even after the business assets has been sold and liquidated.
  2. Yes, unlimited partnership is fair between them.
  3. They would need to draft or get a solicitor to draft a Partnership Agreement or Memorandum of Partnership Agreement to set out the regulations of the partnership
  4. This will mean that the partnership could be dissolved at the instance of any aggrieved party within a reasonable time or such party can waive his right to such claim.
  5. The agenda is quite simple with less formalities. Three people want a legally registered business with less formalities. The only condition is that their liabilities are unlimited to the assets of the business.
  6. The history that precedes the partnership was a simple local business that was unregistered. They also took a loan from the bank.

This could have been dealt with by an initial registration so they could keep their money in the bank and prevent it from being frequently stolen. This could have helped them reduce the loan they would have taken.

Also, they could have taken a market survey at their new location to ensure they know how to develop the business.

Lastly, the competition should have been addressed quickly to ensure consumers stay loyal to their restaurant.

  1. Since it is an unlimited partnership where risks, profits and losses are shared equally, they will be held personally and equally liable. It is also trite law that whatever actions a partner takes in respect of the business is binding on all partners. Therefore, they are liable.
  2. They can dissolve the partnership by the following ways:
    1. Sale of business to another person, firm or company
    2. Merger with another business
    3. Declaration of bankruptcy
    4. Registration of dissolution with the appropriate authorities.
  3. Since they are all liable, and this is an unlimited partnership unlike a limited liability partnership, their properties can be attached to settle their debts even to the very last properties they all personally possess.
  4. Yes, their losses will be shared equally because they hold the same liability.
  5. Unlimited partnership has its liabilities extend to all the personal properties of all the partners.

 

 

References

Anna Lemos “What is the Definition of Unlimited Partnership” Company Formation, Retrieved via https://www.companyformations247.co.uk/blog/faqs/unlimited-partnership-definition/

Businessinfo.cz “Unlimited Partnership” Retrieved via http://www.businessinfo.cz/en/psc/start-your-business/registration-of-legal-form-of-business/unlimited-partnership.html

Marie Hutington, “The Difference Between Limited & Unlimited Liability” Retrieved via http://smallbusiness.chron.com/difference-between-limited-unlimited-liability-61771.html

FindLaw, “Partnership Rules: FAQ” Retrieved via http://smallbusiness.findlaw.com/incorporation-and-legal-structures/partnership-rules-and-faqs.html

Michelle Reynolds, “Typical Examples of a General Partnership” Retrieved via  http://smallbusiness.chron.com/typical-examples-general-partnership-62195.html

Investopedia, “What is a ‘General Partnership” Retrieved via https://www.investopedia.com/terms/g/generalpartnership.asp

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