PARTNERSHIP

INTRODUCTION
A partnership is an unincorporated company. It is regulated by registration with the Registrar
of Businesses (ROB) under the Registration of Businesses Act 1956.

The Partnership Act 1961 provides for the regulation of the relationships of the partners in
the partnership.

MEANING & NATURE OF PARTNERSHIP

Section 3 (1) of the Partnership Act 1961 defines partnership to mean a business relation
carried out between two persons or more with a common aim of making profit.

Section 2 - ‘Business’ includes every trade, occupation or profession (and it involves goods or
services).

Formation
i. Lawful purpose - the partnership must be formed for a lawful purpose. Thus, a
partnership to share in the profits of a crime is illegal.

ii. The business is governed by the Partnership Act 1961 which provides for the
regulation of the relationships of the partners in the partnership.

iii. Registration - the partnership must be registered with the registrar of businesses
under the Registration of Business Act 1956. Must register immediately before
commence of business.

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Characteristics of partnership

• Firm and Firm Name – s.6 - persons who have entered into a partnership with
another are called collectively a FIRM, and the name under which their
business is carried on is called the firm name e.g. ABC & Associates or XYZ &
Partners.

• Number of persons to form a partnership - there must be more than one

person to constitute a partnership.

In a normal business partnership the limit is min. 2 – max. 20 persons.

Professional partnership – there is no limit on the number of partners.

(Professionals – e.g. doctors, accountants, lawyers, engineers, architects etc.)

Capacity

• General Rule - any person sui juris is capable of entering into a partnership
agreement.

• A minor may enter into a partnership with an adult but may not be liable for any
debts incurred by the partnership whilst he was still a minor.

(Sui juris means having full legal rights or capacity. Thus a person who wants to be a
partner of a firm must have the legal capacity i.e. he must have reached the age of
majority and of sound mind. A person of unsound mind is not competent to enter into
a partnership agreement).

Duration of partnership

There is no fixed time frame. The partners are free to fix the duration of the partnership.

If there is no duration fixed, s. 28(1) and s.34 (1) provides that any partner may terminate
the partnership at any time by giving notice of his intention to the other partners.

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ADVANTAGES OF A PARTNERSHIP

No: Advantages
1 i. Easy to form a partnership and
commence business.
ii. Fewer formalities than to
incorporate a company with its
many regulations.
2 i. Capital - requires a low start-up
cost to go into business.
ii. Has a wider capital base
compared to a sole proprietor.
iii. With more than one owner, the
ability to raise funds may be
increased, because two or more
partners may be able to
contribute more funds and their
borrowing capacity may be
greater.
3 i. Ability to combining different
skills, expertise and resources
of partners.
ii. A wider pool of knowledge,
skills and business contacts as
compare with a sole
proprietorship.
4 A partnership is not a separate
legal entity and doesn’t pay income tax
on income earned by the partnership.
Each partner is taxed individually,
meaning each partner includes business
income on his personal income tax
return.

5 Shared Responsibility – Partners can

share the responsibility of the running of
the business. This will allow them to
make the most of their abilities. Rather
than splitting the management and
taking an equal share of each business
task, they might well split the work
according to their skills
6. The documentation and accounts for
the partnership can also be kept
confidential and need not be disclosed
to the public, unlike a company, which
must make all company documents
available for public inspection.

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DISADVANTAGES OF A PARTNERSHIP

No: Disadvantages
1 i. It may be difficult to find
suitable partners.
ii. Partners may not be able to
work together and may
cause a failure in the
partnership
2. Unlimited liability to the point that
private resources may have to be
used to meet partnership debts.
Partners can be jointly and Severally
Liable – This is potentially very
dangerous as partners are jointly and
severally liable for partnership debts
regardless of
whether or not they had prior
knowledge of the activities.
3. Limited to 20 persons for normal
business partnership except
Professional partnership where
there is no limit on the number of
partners.
4. No perpetual succession i.e. it lacks
succession as the duration of the
partnership is uncertain. (If any
partner is incapacitated by injury or
illness, withdraws, sell his interest or
a new partner is admitted into the
business, the existing
partnership comes to an end).
5. In a partnership firm it is not easy to
transfer ownership. One person’s
stake cannot be transferred to
another without prior consent from
all the remaining partners. This
inflexibility is undesirable especially
when the parties have existing
disagreements.
.

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RIGHTS, DUTIES & LIABILITIES OF PARTNERS

RIGHTS OF PARTNERS – Section 26.

Subject to any agreement, the rights of partners are as follows:-

a) All Partners are entitled to share equally in the capital and profits of the business
and must contribute equally towards the losses sustained by the firm.
Every partner has an equal share in the profits of the partnership enterprise.
Otherwise, they have to share the profit and loss as per the agreed ratio stated in
the partnership deed.

b) The firm must indemnify every partner for payments made and personal liabilities
incurred by the partner in conducting the ordinary business of the firm or for the
preservation of the business or property of the firm.

c) Any partner who makes payment or advances for the purposes of the partnership
which is beyond the amount of capital which he agreed to subscribe is entitled to
interest at the rate of eight percent (8%) per annum from the date of the payment or
the advance.

d) a partner is not entitled, before the ascertainment of profits, to interest on the

capital subscribed by him;

e) Every partner has the right to take part in the management and conduct of day to day
affairs of the business of the partnership enterprise

f) No partner shall be entitled to remuneration for acting in the partnership business

g) No person may be introduced as a partner without the consent of all existing partners

h) Differences that may arise concerning ordinary matters connected with the
partnership business may be decided by a majority decision, but changes as to the
nature of the partnership business requires the consent of all existing partners.

i) The partnership books must be kept at the principal place of business of the
partnership because every partner has the right to access these records

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DUTIES OF PARTNERS
The principle of ‘utmost good faith’ between partners is implicit in every partnership
agreement.

1) Duty of partners to render accounts.

S30 – partners are bound to render (present) true accounts and full information of
all things affecting the partnership to any partners or his legal representatives.
(assess performance of the partnership)

2) Duty of partners to disclose all matters affecting the partnership

S30 also requires partners to render full information of all things affecting the
partnership. Partners are prohibited from using partnership information or
partnership connections for personal gains, regardless that it may not harm or be
detrimental to the partnership.
(ensure elements of transparency and openness among partners)

3) Duty of partners to account for profits made

Section 31(1) - Every partner must account to the firm for any benefit derived by
him, without the consent of the other partners, from any transaction concerning the
partnership or from any use by him of the partnership property, name or business
connection.
A partner is therefore not allowed to make any secret profits or secret benefits by
using the partnership’s property, or the firm’s name or the firm’s business
connections.

4) Duty of partner not to compete with the firm

S32 – if a partners, without the consent of the other partners, carries on any business
of the same nature as and competing with that of the firm, he must account for and
pay over to the firm all profits made by him in that business. (avoid conflict on
interest)

Partnership property
Section 22 Partnership Act 1961
Partnership property refers to any property that belongs to the firm and all the partners are
entitled to deal with it in the performance of the partnership business. The partnership
property may exist if:

• It is originally brought into the partnership stock, i.e. brought as the capital

• acquired by purchase or on the firm’s account or

• Acquired by purchase or otherwise for the purpose and in the course of

partnership business.

✓ A partner must account for any profit made as a result of using partnership property
and asset. It is a breach of duty if such profits are not accounted for.
✓ Firms name is considered partnership property because it is a form of goodwill with
regards to existing and new clients.
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 ✓ It is a breach of duty to use the firm’s business connections to gain personal benefit
✓ Partnership accounts must be settled when there is dissolution of partnership.

LIABILITY OF PARTNERS

1) Partners are jointly and severally liable to each other in civil cases but not jointly in
criminal cases.

S. 11 & S.14 provides that every partner is liable jointly with his co-partners and also
severally for everything for which the firm becomes liable while he is a partner.

Criminal liability: Partners are not jointly liable in criminal cases.

In Chung Shin Kian & Anor v Public Prosecutor (1980), during a raid by the officers
of the Trade Description Dept., on his tailor shop they found imitation clothes with
‘Texwood’ labels. Only the first partner was present in the shop. The second partner
was not present. Both were convicted and sentenced for an offence under the Trade
Description Act 1972. On appeal, only the second partner succeeded as there was no
evidence to implicate him.

S. 14 provide for joint liability for breach of contracts but not criminal liability -
Osman bin Hj Mohamed Usop v Chan Kang Sui (1924).

‘Jointly liable’ means that all the partners are liable together.

‘Severally’ means each partner will have to pay his portions of the liability.

2) Unlimited liabilities on every partner.

Partners can be liable for any debts of the partnership whether it was incurred by a
partner directly or any other partners. This is because the partnership is considered
not to be separate from its owners unlike a company that has separate legal
personality.

3) Every partner is an agent of the firm – s.7. Thus any act or omission committed by one
partner binds the rest of the partners if it is carried out within the ordinary scope of
the firm’s business – s.7.

4) Partners are bound by any acts executed in the name or on behalf of the firm – s.8.

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 5) A third party may hold the firm and the partners liable provided
i. The act was done for the purpose of the business of the firm;
ii. The act must be done in the firm’s ordinary course of business;
iii. The act must be done by the partner as a partner of the firm and not in his
own personal capacity.

Dissolution or termination of partnership

Dissolution is the ending or termination of a partnership and depending on the partnership
agreement; the partners are entitled to share the assets of the partnership when it is
determined.

A partnership can be dissolved in one of the several ways such as:

1. By Agreement
a. The partnership articles may state a fixed duration of the partnership and this
terminates upon expiry of the agreed period.

b. The partners may mutually agree to dissolve the partnership at any time.

2. By Operation of Law
Dissolution by expiration of partnership – s.34 (1) provides that subject to any
agreement between the partners, a partnership is dissolved

(a) If entered into for a fix term, the partnership is dissolved when the duration of
time fix reaches its full term – s.34 (1) (a);

(b) if entered into for a single adventure or undertaking, the partnership is

dissolved upon completion of that single adventure or undertaking, e.g. a one
time business venture or assignment, which will come to end upon completion
of that business venture or assignment – s.34 (1) (b);

(c) if entered into for an undefined duration of time, by any partner giving notice to
the other partners of his intention to end the partnership by serving a notice.
Such partnership is known as Partnership at Will which can be terminated by
notice at any time – s.34(1)(c).

3. Dissolution by death or bankruptcy

S35 (1) Subject to any agreement between the partners, every partnership is
dissolved upon the death or bankruptcy of any partner.
If a partner should send a notice of termination of partnership and dies before the
other partners received the notice, the partnership is said to be dissolved by death
of the partner and not by notice.

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4. Dissolution by supervening illegality of partnership
S36 – a partnership is dissolved by the happening of any event which makes it
unlawful for the business of the firm to continue or for the other partners to carry it
on in partnership.

5. Dissolution by the Court

❖ By s.37 of the Partnership Act 1961, a partner may apply to the court for dissolution
of the partnership in six different situations. The power of the court under this
section is entirely discretionary as the section states that the court may decree a
dissolution.

o Insanity of a partner
Section 37(a) provides that when a partner is found to be a lunatic or is
shown to be of permanently unsound mind, an application may be made to
the court for a dissolution of the partnership.

o Permanent incapacity
Section 37(b) provides that the court may also order a dissolution where one
partner becomes, in any other way, permanently incapable of performing his
part of the partnership contract. The application in such a case can only be
made by the other partner.

Thus, if A and B are partners in a hairdressing business and A suffers from

permanent paralysis of his arms, B may apply to the court for a dissolution on
this ground.

o Prejudicial conduct
Section 37(c) provides that a partner may apply to the court for a dissolution
of the partnership when another partner has been guilty of such misconduct
as, in the opinion of the court is calculated to prejudicially affect the carrying
on of the business, regard being had to the nature of the business.

This may be illustrated by the case of Carmichael v Evans (1904). In this case,
C and E were partners. C was convicted of travelling on the railway without a
ticket with intent to defraud. It was held by the court that as the conviction
was for dishonesty, it was calculated to be detrimental to the partnership
business.

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 o Wilful or persistent breach
Section 37(d) provides that where one partner wilfully or persistently
commits a breach of the partnership agreement or otherwise conducts
himself in matters relating to the partnership business that it is not
reasonably practicable for the other partner or partners to carry on business
in partnership with him, then they (the other partners) may apply to the
court for a dissolution.

This may be illustrated by the case of Cheeseman v Price (1865). In this case,
the offending partner had failed to enter small sums of money received from
customers into the accounts as he was required to do under the agreement.
This had happened 17 times. The court held that there was persistent breach
and ordered a dissolution.

o Carrying on the business at a loss

Section 37(e) provides that the court may order a dissolution if the business
can only be carried on at a loss. It must be shown that there is no more
possibility of making a profit. Where there is still some possibility that the
business could be made profitable if more attention is given in the future,
the court will not order a dissolution.

o Just and equitable ground

Section 37(f) provides that the court may order a dissolution of the
partnership when the circumstances of the case are such that, in the opinion
of the court, it is just and equitable to do so. An example of a situation where
the court would consider it just and equitable to wind up the company is
where the partners can no longer work together and have reached a
deadlock. See: Re Yenidge Tobacco Co Ltd [1916] 2 Ch 426; Ebrahimi v
Westbourne Galleries Ltd [1973] AC 360.

Notice of dissolution
To avoid incurring liability after dissolution, section 39 states that a partner may give
public notice of dissolution and can compel the other partners to sign the necessary
notices of dissolution. This also applies to the retirement of a partner.

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LIMITED LIABILITY PARTNERSHIP
Existing conventional partnership or private company (Sdn Bhd) may convert into
Limited Liability Partnership to enjoy the following key benefits: -
• protection of limited liability to its partners similar to the limited liability enjoyed by
shareholders of a company
• Less strict statutory compliance requirements & lower compliance costs – Not
necessary to have audited accounts
• Perpetual legal existence
• Unlimited capacity

Limited Liability Partnership (LLP or PLT)

General partnership limited liability partnership

Partners – unlimited liability Partners have limited liability
Maximum of 20 members unlimited members
Every partner is responsible for the Separate legal entity
firm and can be sued. No separate legal
entity
No such provision in the Partnership Convertible to a limited company and
Act 1961for conversion to a limited vice versa.
company.
Partnership is dissolve if any partners Perpetual succession.
withdraws or dies.
Regulated by the Partnership Act 1961. Regulated by the Limited Liability
Partnership Act 2012.

Key features of a limited liability partnership under the Limited Liability Partnership Act
2012?

Section 3 LLP Act 2012 -

S3 (1) A limited liability partnership is a body corporate and shall have legal
personality separate from that of its partners.

S3 (2) A limited liability partnership shall have perpetual succession.

S3 (3) Any change in the partners of a limited liability partnership shall not affect the
existence, rights or liabilities of the limited liability partnership
S3 (4) A limited liability partnership shall have unlimited capacity and shall be capable
of-
(a) suing and being sued;
(b) owning and disposing of its property; and
(c) doing and suffering such other acts and things as bodies corporate may
lawfully do and suffer.

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Difference between an LLP and a Company

• No issuance of shares
• No requirements to submit financial statements to CCM (COMPANIES COMMISSION OF
MALAYSIA)
• Accounts need not be audited but there is a requirement to maintain accounts

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