It is good to know the theory about Partnerships, (which you can read in our other article on Partnerships), but how does it really work. What are the consequences if one enters into a Partnership This article will give you some background on practical issues of Partnerships.
A Partnership is not a separate legal entity, except for certain purposes. A Partnership is established by an agreement between two or more persons, or an individual and a legal entity (Company, Close Corporation) or between two or more legal entities for a specific purpose. For some areas of the law, a Partnership is treated as a legal entity and in other areas, it is not.
For Afrikaans version: Vennootskappe
Since a Partnership is established by an agreement, the Partnership agreement should state exactly what each Partner must bring to the table, what each Partner is liable for and what each Partner will receive. The Partnership agreement is basically the founding document of the Partnership and is the single most important document in the Partnership. If there is no written agreement, there must be a verbal agreement and the verbal agreement must be clear and concise. Where there is no written agreement and no clarity on the verbal agreement, the court will look at how the partners “operated” the Partnership. Patterns in the Partnership will be an indication of what partners were and were not entitled to and what each partner was supposed to bring to the table and was liable for. It is further imperative to determine in the Partnership agreement how much power each partner has to bind the Partnership in legal agreements. Read more about this last sentence below in point 5.
We cannot urge you enough to make sure that when you enter into a Partnership with anybody to get it in writing and have every party sign the Agreement. It can’t be just any agreement – there are certain requirements that must be contained in a Partnership agreement, so be sure to use the services from somebody who knows how to draft a Partnership agreement.
Make sure each partner receives a copy of the agreement and have the original kept in safekeeping: preferably not on the premises. It would be best to store the original agreement either in a bank deposit box or in the safe of the person who drafted the agreement for the Partnership if you used an attorney.
1) Each partner owns the assets of the Partnership jointly and they are all co-owners of the assets. This follows that the assets of the Partnership do not belong to the Partnership, but to the partners jointly in undivided shares. To own assets in undivided shares, means that if there is office furniture and cash and a building in the Partnership, for example, each partner owns an undivided share of the office furniture as well as the cash as well as the building. It is not as if partner X owns the office computer or half of it and half of the building or half of the cash (if there is only two partners and they are 50-50 partners). The share that partner X owns cannot be specifically pointed out, he merely owns 50% of everything without everything being exactly divided in two.
2) The partners are jointly and severally liable for the debts and liabilities of the partnership. Jointly and severally mean that all the partners together as well as all the partners separately are liable for the debt and liabilities of the partnership. Further, this means that a creditor can act against all the partners or against just one of the partners, but eventually, everybody, or at least one of them, must settle the debt and the liabilities if the others cannot.
3) A partner’s personal assets are also attachable if there is debt in the partnership that cannot be paid. If, for example, a creditor of the Partnership issues a Warrant for Execution to attach the assets of the Partnership and there are none of the assets that are attached are not sufficient to settle the outstanding debt, such a creditor can issue a Warrant for Execution to attach the personal assets of each and every partner until his debt is settled in full. If only one of the partners has personal assets, then the creditor will be entitled to attach those assets of such a partner.
4) When the Partnership’s liabilities exceed its assets, then the Partnership is insolvent and for the purposes of insolvency, the Partnership is treated as a legal entity and the Partnership can be sequestrated. Not only is the estate of the Partnership sequestrated, but the estate of each partner is also sequestrated simultaneously. There will be an application for the Partnership itself and an application for each partner. So if there were 3 partners, there will be four separate sequestration applications that are lodged simultaneously. (3 partners plus Partnership).
5) Any of the partners can enter into legal agreements on behalf of the Partnership. This means that a partner can enter into an agreement without the knowledge of the other partners and incur debt for the Partnership and impose obligations on it. If the Partnership agreement referred to above does not restrict a partner’s ability to act on behalf on the Partnership, there will be nothing that the other partners can do if a partner has entered into agreements on behalf of the Partnership and the Partnership will be bound by it.
6) The Partnership cannot exist separately from the partners, because the Partnership is not regarded as a legal entity (with exceptions). This means, that although the Partnership exists, the partner will also be personally jointly liable for the debt and actions of the Partnership. However, property can be registered in the name of the Partnership even if it is not regarded as a separate legal entity. Legal proceedings can also be instituted in the name of the Partnership and the Partnership can, in its own name, take legal action against a third party.
7) The partners are jointly entitled to the profits of the Partnership and other benefits that flow from the Partnership. Each partner will get his share of the profits and benefits as is set out in the Partnership agreement. This will depend on each partner’s contribution and how the parties agreed upon the profit sharing will be. If there is no written partnership agreement and the partners differ on the version of the verbal agreement, each partner will be entitled to share in the profits and benefits of the Partnership in proportion to his/her contribution to the Partnership. The same applies to when the Partnership dissolves.
It remains the single best thing to sign a written Partnership agreement so that the liabilities of each partner, the capabilities of each partner, and the profit-sharing of each partner is set out clearly. Each Partnership makes its own internal arrangements to the extent that it suits the partners as a group.
You can also find out how a partnership in SA is taxed on our sister website - Find an Accountant.
