Business Structures?

A person can choose from various options when starting a business.

 Sole proprietorship
 Partnership
 Company
 Nonprofit motive organization
Sole Proprietorship / Trader
What is a sole trader?
 It is an individual / natural person who owns a business as the principal.
 That individual is the only person responsible for the provision of funds
required to operate the business.
 That individual is responsible for the risks involved in operating the
business.
 That individual is responsible for running the business.
 That individual is responsible for the debts of the business.
 That individual is responsible for the profits of the business.
For examples; Plumbers, electricians, gardeners, freelance writer, graphic designer,
baker.
Benefits for sole proprietorship
 Easy to establish
 May suit small businesses
 Relatively cheap to establish
 Reduced formalities compared to a company
 Autonomy in decision making
 Owner retains all the profits rather than distributed between partners or
shareholders.
Disadvantages for sole proprietorship
 No separation between business and personal assets;
 Business income included in owners personal income tax return
 Owner responsible for all the debts of the business
 Owner can be sued individually
  Business cannot unless sold operate in perpetuity.
The law of sole proprietorship
There isn't a specific set of laws governing sole proprietorships because they are
essentially an extension of the owner.
A sole trader does however may need to comply with:
 Business Names Act [section 2.(b) with regard to registration]
 Goods and Service Tax and Australian Business Number registration
requirements
 Consumer Laws
 Sale of Goods legislation
 Employment laws
 Work safety laws
 Income tax laws etc.
Law of partnership
Partnership is the relation which subsists between persons carrying on a business in
common with a view of profit.
For example of partnership: law firms, physician groups, real estate investment
firms and accounting groups.
Advantages of partnership
 two heads (or more) are better than one
 your business is easy to establish and start-up costs are low
 more capital is available for the business
 you’ll have greater borrowing capacity
 high-calibre employees can be made partners
 there is opportunity for income splitting, an advantage of particular
importance due to resultant tax savings
 partners’ business affairs are private
 there is limited external regulation
 It’s easy to change your legal structure later if circumstances change.
Disadvantages of partnership

(a) Liability of partners- Each partner is unlimitedly liable for the debts and
obligations of the partnership. Even after death, a partner's estate can be subjected
to liability for the obligation of the firm. All partners are liable for any act of each
and every partner in respect of the matters relating to the business. The liability of
a partner does not end with the contributions made by him to the partnership unlike
in a limited liability company.
(b) Limited number of partners- The number of partners is limited to twenty. Only
reliable persons are taken into a partnership, because of the nature of the
partnership relationship. When the number grows, it is not possible to maintain
mutual trust and confidence (fiduciary relationship) between the partners.
(c) Transfer of shares- It is not possible to transfer the interest in a partnership
business as in the case of a limited liability company. This also limits the number
of partners as its aim is to maintain equal sharing of profit and loss in the business.
(d) The problem of agency-Every partner is an agent of the firm, and has dual
character as an agent and principal. For any act done by one partner, all partners
including the partners in question will be liable. Any conflict between partners may
lead to dissolution of the partnership, as in Re. Yenije Tobacco Company, where
the two partners were not in speaking terms, led to dissolution of the business.
Every partner binds the firm and other partners as in Mercantile Credit Ltd Vs
Garrod, (1962 3All ER 1103) A and B were partners carrying on a car sale. A sold
a car without the authority of B which was not owned by the firm. Court held that
B was liable for the act of A.
(e) Unanimous decisions-All matters pertaining to a change of the membership,
have to be decided unanimously. This requirement may hamper the unity of the
partnership.
(d) Preference to companies- More preference is given for the formation of
companies to do business, as the partnership business has its inherited weaknesses.

The law of Partnerships

The law that is applicable -
  Business Names Act
 Partnership Ordinance
 Partnership Act of UK through Civil Laws Ordinance
 Prevention of Frauds Ordinance – section 18
 Companies act – s. 519
Formation of Partnerships
No requirements/formalities or legal steps are needed to create a partnership
A partnership is formed through an agreement between partners, which can be
written, oral, or inferred from their conduct.
If a partnership operates under a name other than the full names of all partners, it
must be registered under the Business Names Act 1987 of Sri Lanka.
Sri Lanka lacks a comprehensive statute for partnership, despite the Partnership
Ordinance 1866. Therefore, the Partnership Act 1890 of the UK is applicable to Sri
Lanka, as stated in section 3 of the Civil Laws Ordinance.
Under the prevention of Fraud Ordinance, if the capital of a partnership exceeds
Rs.1000/- there must be a contract. It also provide that, (in the same section) parole
evidence can be used to establish the existence of a partnership.
The Companies Act 2207, as per S. 519, restricts the number of partners in a
partnership to 20.
Determination of a partnership
For a partnership to exist, four elements must be present:
1. a business must be carried on;
2. By and between 2 - 20 persons
3. it must be carried on in common; and
4. It must be carried on with a view of profit.
According to section 1 (1) of the Act, a “partnership is the relation which subsists
between persons carrying on a business in common with a view of profit”.
In the case of Smith v Anderson (1880) 15 ch d 247, the English court decided that
an isolated or one-off activity is unlikely to meet the criterion “carrying on a
business”.
A partnership may exist if two parties agree to a single event, but not if they intend
the event to be part of a series.
Section 4 (1) of the Partnership Act provides that “persons who have entered into
partnership with one another are for the purposes of this Act called collectively a
firm”. However, the firm has no separate legal existence. As such the partners may
sue or may be sued in the name of the firm.
Accordingly, under the law of England, “a partnership or a firm is not an entity
separate and distinct from the partners who at any time may compose it. The firm
cannot acquire rights nor can it incur obligations. A firm cannot hold property. The
rights and liabilities of a partnership are the collection of the individual rights and
liabilities of each of the partners.
Duhilanomal and Others v Mahakande Housing Co. Ltd., [1982] 2 Sri LR 504
From Yasoda Holdings v. Peoples Bank
The partnership is managed by its partners, but this can be altered to be managed
by:
1. One or more partners to the exclusion of others,
2. a third party, or
3. any other structure
It depends on the agreement between the partners concerned. A partnership does
not have to make a profit, but it must be established with the intention of making a
profit.
Non-profit activities, Sporting clubs, not-for-profit societies, community services
or religious organizations cannot be partnerships.
In certain circumstances, receiving a share of profits does not automatically
make the recipient a partner. (In particularly, there is no partnership in the
following cases)
919 page
Mutual Agency- – s.5 Partnership Act UK
Every partner is an agent of the firm and his other partners for the purpose of the
business of the partnership.
Every partner, as an agent of the firm, binds the firm in the ordinary course of
business
If a party is unaware of a partner's lack of authority or does not believe them to be
a partner, their acts on behalf of the partnership and within its business scope bind
the partnership and all co-partners.
If profits (as well as losses) are shared, the evidence of a partnership is stronger.
But the presumption can be rebutted by showing that the purpose of sharing profits
was for some other reason.
Relations of partners to persons dealing with them (Authority of partners)
Partnership Act 1890 of UK
Section 5 of the Partnership Act articulates the power of partner to bind the firm. It
provides;
“Every partner is an agent of the firm and his other partners for the purpose of the
business of the partnership; and the acts of every partner who does any act for
carrying on in the usual way business of the kind carried on by the firm of which
he is a member bind the firm and his partners, unless the partner so acting has in
fact no authority to act for the firm in the particular matter, and the person with
whom he is dealing either knows that he has no authority, or does not know or
believe him to be a partner.”
• This section thus makes it clear that the basic tenet of English law of partnership
is the concept of mutual agency. It emphasizes on the relationship among the
partners since a partner cannot be an agent of the firm as it lacks legal personality.
• Accordingly, under English law, a partner has a dual capacity as an agent and a
principal, the latter of whom has an unlimited liability for the acts of his agent/s.
• In other words, a partner acts as agent for the partners collectively and as agent of
the other partners in their individual and separate capacities. In that sense, partners
are both principal and agent and, therefore there are two-way fiduciary duties. See
further Phillips-Higgins v Harper [1954] 1 QB 411.
• Premised upon this tenet, section 5 provides for the flowing main principles;
1. An act of a partner on behalf of the firm within the scope of the partner’s actual
authority binds the firm.
2. An act of a partner on behalf of the firm in the course of carrying on the
partnership business in the usual way also binds the firm. This is because the
partner acts with implied or apparent authority.
3. When the person with whom a partner is dealing either knows that he has no
authority, or does not know or believe him to be a partner; such act does not bind
the firm and his partners
In sum, “a partner who acts within the scope of his actual authority (express or
implied) will bind the partnership.” On the contrary, an act of a partner done
without actual or apparent authority not binding on the firm yet may become
binding on the firm if it is subsequently ratified.
• The boundary of a partner’s implied authority depends on the usual course of the
particular business carried on by the partnership.
• As a general rule partners have unlimited liability for the partnership’s
obligations.
• According to section 6 of the Partnership Act partners are bounds by acts on
behalf of the firm.
“An act or instrument relating to the business of the firm and done or executed in
the firm-name, or in any other manner showing an intention to bind the firm by any
person thereto authorized, whether a partner or not, is binding on the firm and all
the partners”. See: Mann v. D’Arcy [1968] 1 WLR 893
• However, sections 7 and 8 provide for specific rules restricting the liability of the
firm where a partner uses the credit of the partnership for private purposes and
where notice has been given of a restriction on a partner’s authority.
• Section 7 deal with the situation where a partner using credit of the firm for
private purposes. Accordingly the Act says;
“Where one partner pledges the credit of the firm for a purpose apparently not
connected with the firm's ordinary course of business, the firm is not bound, unless
he is in fact specially authorized by the other partners; but this section does not
affect any personal liability incurred by an individual partner”.
• A partnership could limit the power of a partner to bind the partnership by giving
notice of the restriction to third parties. The effect of such notice is articulated in
section 8 of the Partnership Act. Accordingly;
“If it has been agreed between the partners that any restriction shall be placed on
the power of any one or more of them to bind the firm, no act done in
contravention of the agreement is binding on the firm with respect to persons
having notice of the agreement.”
• According to section 9 the unlimited liability of a partner in his capacity as a
principal extends to any debt or obligation of the firm incurred while he is a
partner.
“Every partner in a firm is liable jointly with the other partners… for all debts and
obligations of the firm incurred while he is a partner; and after his death his estate
is also severally liable in a due course of administration for such debts and
obligations, so far as they remain unsatisfied…” (Section 9; Liability of partners)
This can be considered as one of the important legal characteristics of partnership.
• Under section 10 and 12 “partners are jointly and severally liable for loss and
injury caused to a third party by a partner who commits a wrong while acting
within the limits of his actual or apparent authority.”
• According to section 10, the partnership is liable for the wrongful acts of a
partner who acted in the ordinary course of the business of the firm. According to
section 12 of the Act, liability incurred under the section 10 is joint and several.
“Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the firm, or with the authority of his co-partners, loss or
injury is caused to any person not being a partner in the firm, or any penalty is
incurred, the firm is liable therefor to the same extent as the partner so acting or
omitting to act” (section 10; liability of the firm for wrongs) See: Hamlyn v.
Houston & Co. [1903] 1 KB 81
• Under sections 11 and 12 “partners are also jointly and severally liable for the
misapplication of money or property which a partner receives in the course of
carrying on the partnership business or which is in the custody of the firm.”
Accordingly, section 11 says that;
In the following cases; namely-
(a) Where one partner acting within the scope of his apparent authority receives the
money or property of a third person and misapplies it; and
(b) Where a firm in the course of its business received money or property of a third
person, and the money or property so received is misapplied by one or more of the
partners while it is in the custody of the firm; the firm is liable to make good the
loss
Rhodes vs Moules [1895] 1 chancery 236.
Here the plaintiff sought to raise money. He went to a solicitor in a firm who told
him that the lenders. And therefore the plaintiff hand over solicitor some share
warrants. The solicitor misappropriated them and the plaintiff sued the firm under
Section 11Court held that the firm was liable under both heads [both paragraphs]
because the share warrants are received in the ordinary course of the business and
in the apparent
• Section 15 provides that admissions and representations made by a partner
concerning partnership affairs and in the ordinary course of business are evidence
against the firm.
• The liability of a partner remains as long as the other partners (as agents) have
authority to bind that partner. However the Act expressly provides for the liabilities
of incoming and outgoing partners.
• With respect to the liability of an incoming partner; “a person who is admitted as
a partner into an existing partnership does not thereby become liable to the
creditors of the partnership for anything done before he became a partner”.
• In other words, under section 17 (1) of the Act, a partner is not liable for
obligations incurred before the agency relationship is created, unless there is
agreement to the contrary.
• With respect to the liability of an outgoing partner; “a partner who retires from a
partnership does not thereby cease to be liable for partnership debts or obligations
incurred before his departure.”
• Under section 17 (2) of the Act, a partner remains liable for partnership debts or
obligations incurred before his retirement. It means that partners are liable for the
activities of the firm during their tenure in office as a partner.
• Also, under section 36 of the Act, a partner is not liable for obligations incurred
by his former partners after the agency relationship has ended. This is because
section 36 (3) says that;
The estate of a partner who dies, or who becomes bankrupt, or of a partner who,
not having been known to the person dealing with the firm to be a partner, retires
from the firm, is not liable for partnership debts contracted after the date of the
death, bankruptcy, or retirement respectively.
• At the same time, the retiring partner can be released from the obligations under
section 17 (2) by agreement with the other partners and the creditors of the
partnership.
According to section 17 (3) of the Act;
A retiring partner may be discharged from any existing liabilities, by an agreement
to that effect between himself and the members of the firm as newly constituted
and the creditors, and this agreement may be either express or inferred as a fact
from the course of dealing between the creditors and the firm as newly constituted.
• Under section 36 (1) of the Act when a person deals with a firm after a change in
its constitution he is entitled to treat all apparent members of the old firm as still
being members of the firm until he has notice of the change. As a result, a retiring
partner will be liable for obligations incurred by his former partners after he leaves
the partnership unless he gives notice of his withdrawal to any third party with
whom the former partners deal. See: Tower Cabinet Co. Ltd v. Ingram [1949] 2
KB 397.
There are various ways where one partner receive power
1. Express/actual authority
2. Implied/usual authority
3. Apparent/ostensible authority
1. Express/actual authority
Where will this authority be received? By the partnership contract. If the other
partners asked a partner to do some act, this authority will be given. Section 6 of
partnership act could be relied in this Re briggs and company 37 BR Management,
Duties and Rights
2. Implied/usual authority
A particular partner enter into transaction or contract thinking that he has implied
authority. Generally, a partner has implied authority to carry out the necessary
things for the business in the usual manner. Generally a partner has implied
authority to do these kind of acts- To sell goods of the firm- Purchasing goods on
behalf of the business- To receiving payment and giving receipts- Engaging
servants Implied authority can be restricted which is mentioned in Section 8 of the
partnership act There may be restrictions imposed upon the partners and if the 3rd
parties are aware of such restrictions then the other partners and principal will not
be liable. [This is mentioned in Sec. 8]
3. Apparent/ostensible authority
When a particular partner is doing something without express or implied authority,
the other partners behave in a manner which make others think that the particular
partner has power. In this situation this partner will receive apparent authority.
Section 8 applies in this situation also. Mercantile credit company vs Garrod
[1962] 3 All ER 1103Business of partnership was on repairing cars and selling cars
were prohibited by the agreement but when a car was sold to a 3rd party the court
held that the partnership was liable because the 3rd party was not aware about the
restriction.

Management, Duties and Rights – s. 24 PA provides for RULES that apply in

the absence of a partnership agreement
(1) All the partners are entitled to share equally in the capital and profits of the
business, and must contribute equally towards the losses whether of capital or
otherwise sustained by the firm.
(2) The firm must indemnify every partner in respect of payments made and
personal liabilities incurred by him-
(a) In the ordinary and proper conduct of the business of the firm; or,
(b) In or about anything necessarily done for the preservation of the business or
property of the firm.
(3) A partner making, for the purpose of the partnership, any actual payment or
advance beyond the amount of capital which he has agreed to subscribe, is entitled
to interest at the rate of five per cent. per annum from the date of the payment or
advance.
(4) A partner is not entitled, before the ascertainment of profits, to interest on the
capital subscribed by him.
(5) Every partner may take part in the management of the partnership business.
(6) No partner shall be entitled to remuneration for acting in the partnership
business.
(7) No person may be introduced as a partner without the consent of all existing
partners. [This because the personal nature of partnership which means that a
partner has agreed to associate with his co-partners and no-one else]
(8) Any difference arising as to ordinary matters connected with the partnership
business may be decided by a majority of the partners, but no change may be made
in the nature of the partnership business without the consent of all existing
partners.
(9) The partnership books are to be kept at the place of business of the partnership
(or the principal place, if there is more than one), and every partner may, when he
thinks fit, have access to and inspect and copy any of them
Relations of Partners to one another (fiduciary relationship)
In Carmichael v Evans [1904] 1 Ch 486, it was emphasized that partners have a
fiduciary relationship, where mutual trust and confidence are maintained. Partners
must display good faith in all partnership dealings and owe their co-partners a duty
to be honest with third parties, even if the transactions are not partnership-related.
Helmore v Smith
(1886) 35 Ch D 436 at 444
Bacon VC said:
'If fiduciary relation means anything I cannot conceive a stronger case of fiduciary
relation than that which exists between partners. Their mutual confidence is the life
blood of the concern. It is because they trust one another that they are partners in
the first instance; it is because they continue to trust each other that the business
goes on.'
Fiduciary obligations
1. The partners, as fiduciaries, must exercise their rights and duties with
good faith and for the benefit of the partnership as a whole.
2. Each partner owes to each other partner and the firm a duty of loyalty & a duty
of care, which must be exercised in good faith & through fair dealing.
3. The duty of care requires a partner not to engage in grossly negligent or reckless
conduct, intentional misconduct or knowing violations of law.
4. Partner should not make secret profits - Must not use information received in the
course of the partnership business to secure a personal benefit
5. Must not allow any conflict of interest to arise between their partnership roles
and their personal interests.
6. Must make full disclosure of his interest to his fellow partners
7. The duty of loyalty consists of
- holding profits, using partnership property solely for partnership purposes,
and
- refraining from competing with the partnership,
- After dissolution, not dealing with the partnership as or on behalf of one
with an interest adverse.
A Partnership Agreement can eliminate fiduciary duties but cannot eliminate the
duties of good faith and fair dealing.
Bently vs craven
B and C were partners and B was employed to buy sugar for the firm. B without Cs
knowledge sold goods for the firm at the market price and gained a considerable
profit. Court held he mustpay the profits for the firm
Duty of partners
Section 28 and 29 articulate the duty of partners to render accounts, and
accountability of partners for private profits. Partners are bound to render true
accounts and full information of all things affecting the partnership to any partner
or his legal representatives. (Duties of partners)
To be precise, section 29 (1) requires every partner to 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.
s.30 - Partners are bound to render true accounts and full information of all things
affecting the partnership to any partner or his legal representatives
Full and frank disclosure requirement-
- *all things affecting the partnership*, you are to reveal of everything you
know regarding the partnership business, does not include private life
- In other words, when one partner has access to certain information which is
not known to the other partner, the one having information has a duty to act
in good faith and disclose it in full to the other.
- The purpose of this section is to prevent partners from actively misleading
each other
Hogar Estates v Shebron HoldingsIn
This case, there was an agreement to dissolve the partnership because the project
they embarked upon could not get approval. Then, one of the partners agreed to
buy the property. He has certain knowledge on how to get the approval, but he kept
it to himself. He went behind the partners back. The rest of the partners seek to get
an injunction for the transfer and the purchase by that particular partner was set
aside
Law v Law
In this case, a partner sought to sell his partnership share to his co-partner but did
not reveal that it was left with encumbrances. The shares were
encumbered with securities and mortgages. (Land covered with private caveats,
it should be sold under the market price) In this sense, the lack of full and frank
disclosure profited the vendor. The court held that in principal, the transaction
would have been set aside but since they have settled the dispute among
themselves in advance, there was no issue.

Partnership Property
S.21 states that property bought with firm funds, unless there is a clear intention to
buy with firm money, is considered partnership property.
Whatever property that becomes partnership property shall be treated as between
partners (The partnership cannot own property; this is because, under English law,
the partnership firm does not have separate legal personality)
New partners are generally not liable for debts incurred before their admission,
unless they agree to be liable, and will only be responsible for debts and
obligations after entering the partnership.
Retiring partners are only liable for debts and obligations incurred as a partner,
subject to agreement from remaining or new partners and creditors. Creditors may
discharge them by making a new contract of novation.
Partners may be held liable after retirement if they fail to inform clients and
publicly announce their retirement.
Dissolution of partnership
The two ways of dissolution of a partnership-- (a) by operation of law and (b) by
order of a court.
(a) By operation of law.
(i) Lapse of partnership- When the period fixed for the operation of the partnership
ends the partnership come to an end. If entered into a fixed period, the expiration
of that period and if the undertaking is complete it comes to an end. If the
agreement is for an undefined time, by giving notice of dissolution Cunningham V
Lucas (1957) 1 Lloyd's Rep. 416, the question was as to the extent of the venture
for purchase and resale of potatoes.
(ii) Death Subject to any agreement between the partners, every partnership is
dissolved as regards all the partners by death of any partner, and unless all partners
have agreed to the contrary, when one of them dies, his executors have no right to
become partners with the surviving partners. Nor they can interfere with the
partnership business. The executors of the deceased have no power to get the
partnership dissolved.
(iii) Bankruptcy Partners may become bankrupt either individually or collectively.
The causes and consequences of bankruptcy of an individual partner or that of the
firm are in many respects the same. A partnership is dissolved with the bankruptcy
of a partner. Subject to any agreement between the partners every partnership is
dissolved as regards all partners by the bankruptcy of any partner. (Fox V Hanbury
Cowp.448).
(iv) If one partner suffers his share to be charged for his separate debt, other
partners have the option of dissolving the partnership. But the majority would not
have the power to dissolve the partnership against the wishes of the minority.
Either all the other partners must be unanimous or that a separate option is given to
each of the other partners, so that any one of them can dissolve the partnership,
whether the others have or have not expressed their intention of not doing so.
Bearing in mind the serious consequences to the partners of the present option is
being exercisable by one partner only, it is held that a unanimous exercise by the
other partners is required.
(v) Illegality- If the operation of a partnership become illegal by law the
partnership is terminated. A partnership is in every case dissolved by the
happening of any event which make it unlawful for the business of the firm to be
carried on or for the members of the firm to carry on in partnership. In Hill V
Clifford (1907) 2 Ch.236, the partnership became illegal due to one member of a
firm of dentists had been struck off the register.
(b) By court order
(i) When a partner is incapable of managing the business due to mental disorder
the other partners can get a court order to dissolve the partnership. A dissolution of
the partnership may be granted where a partner is incapable by reason of mental
disorder, of managing and administering his property and affairs. The court order a
dissolution not only for the purpose of protecting the patient (Jones v Lloyd 18
Eq.265) but also for the purpose of relieving his copartners from them (Sayer v
Bennet 1 Cox 107).
(ii) When a partner becomes permanently incapable of performing his duties a
partnership can be dissolved. If one partner was of unsound mind court considered
it as permanently incapable of performing duties as a partner. (John V Welch 1
K&J 765) But now it is accepted some other ways also to dissolve a partnership on
permanent incapacity. In Whitwell V Arthur (35 Beav.140) partnership was
dissolved on the ground of incapacity due to a paralytic attack.
(iii)When a partner had been guilty of conduct calculated to affect prejudicially the
carrying on of partnership business, the partnership can be dissolved. In
Carmichael Vs Evans,(1904) 1 Ch.486) one partner was convicted for travelling on
the rail without a ticket and with the intent of defraud. He was convicted and the
court held that his conduct was detrimental to the existence of the partnership. In
Essel V Hayward (30 Beav.158) one partner was liable on a criminal breach of
trust and the other was entitled to dissolve the partnership.
(iv) The court may dissolve the partnership on the ground that a partner willfully or
persistently commits a breach of the partnership agreement or so conducts himself
in matters relating to the partnership business that it is not reasonably practicable
for his co-partners to carry on business in partnership with him. But it will not
dissolve a partnership on the ground of the iltemper or misconduct of one or more
of the partners, unless the others are in effect excluded from the concern.
(Goodman v Whitcom 1 Jac. & W589) or unless the misconduct is of such a nature
as to destroy the mutual confidence which must subsist between the partners if they
are to continue to carry on their business together. Keeping erroneous accounts,
and not entering receipts, refusal to meet matters of business, continued quarrelling
and such a state of animosity as precludes all reasonable hope of reconciliation and
friendly cooperation have been held sufficient to justify dissolution. (Baxter V
West 1 Dr.& Sm173)
(v) When a partnership business can only be carried on at loss a partnership is
dissolved. The expectation of profits is implied in every partnership If, it appears
that the partnership business can only be carried on at a loss, the attainment of the
common end has become impossible. This warrants a dissolution In Jennings V
Baddeley (3 K.& J 78) the capital originally agreed to be furnished had been spent
and some of the partners were unable or unwilling to advance more money, and at
the same time the concern could not have gone on except at a loss unless they did.
(vi) Whenever the court thinks it just and equitable a partnership can be dissolved.
In Re Yenije Tobacco Co. (1916) 2 Ch.426 the partners were not in speaking terms
although the business was making large profits. Court ordered to dissolve the
partnership. Where an application is made by a partner for dissolution on this
ground, the court will be reluctant to entertain an application by another partner for
a stay of the action for the matter to be referred to arbitration. (Olive V Hillier
(1959) 1 W.L.R.551.
IMPLICATION OF DISSOLUTION.
On dissolution any partner may give public notice of dissolution, [S.37] The effect
of the dissolution is to revoke the power to each partner to bind the firm. However,
after the dissolution, the authority of a each partner to bind the firm, and the other
rights/obligations of partners, continue so far may be necessary to wind up the
affairs of the firm and complete transactions initiated before the dissolution [S.38].
To wind up the partnership, the court may appoint a receiver and manager to
supervise the affairs.
On the dissolution of the partnership business:
a. partnership property is used to pay the partnership’s debts; and then
b. The surplus property, if any, is distributed to partners as it is due to them
S.39.
In respect of the settlement of accounts between the partners there are basic rules
which must be followed in the absence of contrary agreement.
First losses must be paid out of profits then. Out of capital and finally, if
necessary, by the partners themselves in the proportion in which they agreed to
share the profits S.44 [a]
Second, the assets of the firm must be applied in the following order S.44 [b]:
a. creditors i.e. banks and other third party creditors are repaid first;
b. advances [loans] by partners to the partnership are repaid next;
c. capital is paid back to each partner
Legal intervention in the partnership relationship does not end on dissolution - it
continues until the affairs of the firm are finally wound up.
Holding out SECTION. 14 - Continued
The liability arises where a person by words or conduct represents to another that
he is a partner, on the strength of which that other person incurs a liability,
believing the representation to be true. Further a person can be responsible for his
silence when one would expect him to speak.
This is called Holding out - A person who represents himself or herself, or
knowingly allows himself or herself to be represented, as a partner to anyone who
has on the faith of any such representation given credit to the firm or incur any
other liability, that person is estopped from denying to the person that he or she is a
partner.

THREE CRITERIA for ‘holding out’

1. There must be a representation by the 'partner' or someone else (for example,
the other partners) that the person is a partner; and
2. Credit must have been given to the firm or incur any such liability; and
3. The person giving the credit must have done so on the faith of the
representation.
Company
• A company structure is more complex and expensive compared to sole
proprietorship and partnership.
• A company is considered as a separate legal entity which is distinct from people
who are controlling it
• One advantage of the company structure is that the shareholders will not have any
personal liability for business debts
• Company law requires a company to be incorporated
• The life time of a company does not end with its owner and it has an ability to
pass ownership
• Company structure is well governed by law; directors and shareholders rights and
duties are specifically mentioned
• Companies are the most common and most popular form of business all over the
world.
Non-profit motive organizations
● These organizations are formed with the intention of promoting social welfare,
education or social and cultural benefit. They do not have a motive on making
profits
● Various individuals and organizations would contribute in maintaining the
organization
Ex- Red Cross, Lion’s club, UNA
● Companies Act No 7 of 2007 covers the registration of a Non-profit organization