LAW OF PARTNERSHIPS

Partnership is defined by S.3 (1) of the Partnership Act as "the relation which subsists between persons
carrying on a business in common with a view of profit". The persons who join hands are individually
known as ‘Partner’ and collectively a ‘Firm’.
Elements of a Partnership
1. The Business: There must be a business, in form of trade, occupation or professional practice with
commercial enterprising, where services or goods are sold for profit example; it will not be partnership,
where a house is owned by three persons who agree on sharing rent.
2. Carried out in common: The business of the partnership must be carried in common. This means each
partner is allowed to participate in the management by law.
3. Sharing of profit/loss: There must be an objective of making profit and mechanism of sharing that
profit or loss.
4. A partnership is an association of persons: A partnership must consist of at least a minimum of two
persons and a maximum of 20 persons

Although the sharing of profits is evidence of existence of a partnership, the following situations do not
constitute a partnership:
✓ Co-ownership of property
✓ An employee receiving a salary from the profits of the firm
✓ A lender being paid interest on the loan from the profits of the firm
✓ A widow or widower of a deceased partner being paid the deceased’s share from the profits of the
firm.
✓ A creditor being paid his debts out of the profits of the firm.
Formation of a partnership
The formation of a partnership is not subject to any legal formalities, the agreement between the
parties may be: -
a) Oral or by word of mouth.
b) Written agreement
c) Implied agreement: Implication from conduct of the parties.
Partnership Agreement
The partners may on their own accord reduce the basis of their relationship into a formal document
detailing the terms and the condition of the association. The document is the Partnership Deed or
Agreement. It is not a legal requirement.
Contents of a partnership deed/agreement
(a) Names of partners
(b) The firm’s name
(c) The nature of business,
(d) Place of business
(e) The date on which the partnership is to commence and the period of its duration if any
(f) The capital contribution by partners
(g) The interest to be paid on loans advanced by the partners to the firm
(h) The bank account and who is to sign the cheques

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 (i) The profit and loss sharing ratios
(j) How to share the management
(k) How accounts will be kept and the provision for auditing accounts
(l) The provision as to whether the firm will continue in business after the retirement, death, or
insolvency of a partner
(m) Arbitration clause- this provides for the resolution of future disputes between the partners through
arbitration.

Rules /Principles Applicable in the Absence of a Partnership Deed

The rules applicable are contained in Section 28 and 29 of the Partnership Act.
1. Profit and loss are shared equally
2. If a partner incurs liability while discharging the firm’s obligations he is entitled to indemnity.
3. If a partner lends money to the firm, he is entitled to interest on the principal at the rate of 6% per
annum
4. A partnership can only change its business with consent of all partners
5. A person can only be admitted as partner with consent of all existing partners.
6. A partner is not entitled to interest on capital before the ascertainment of profit.
7. Every partner is entitled to take part in the management of the firm’s business.
8. A partner is not entitled to remuneration for taking part in the management of the firm’s business.
9. The books of account of the firm must be accessible to all partners
10. Under section 29 of the Act, a partner can only be expelled from the firm if the power to do so is
expressly vested in the partners.

TYPES OF PARTNERSHIP

1. General Partnership

It is created by default. Unlike a corporation, there is no need to file any documents with the state to make
your business a partnership. A general partnership has general partners. Unless the partners have a
partnership agreement stating otherwise, each partner will have:

• The ability to actively manage or control the business.

• Equal authority to make decisions about how the business will be run
• Equal authority to make legally binding decisions.

Partners have no limit on their responsibility for the debts of the business – the partner could lose more
than his investment in the business; if necessary, personal assets will be used to pay business debts.

Each partner in a general partnership “jointly and severally” liable for debts of the business – each partner
is equally liable for the debts of the business, but each is also totally liable.

If a creditor fails to get what he is owed by one partner, he can get it from another partner, even if that
partner has already paid his share of the debt.

2. Limited Partnership
The law relating to Limited Partnership is contained in the Partnership Act 2012.
This is a partnership formed in which at least one partner (the general partner) must have full, unlimited
liability. The other partners have limited liability for the debts of the partnership beyond the extent of the
capital they have contributed.

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Rules applicable to the limited liability partnership
i) Limited partners may not withdraw their capital while the partnership is still ongoing
ii) Limited partners may not take part in the management of the partnership
iii) Limited partners cannot bind the partnership in a contract with a third party without losing the
benefit of limited liability
iv) The partnership must be registered
1. Registration: Under Section 7 of the Limited Partnership Act a limited partnership must be registered
with the Registrar of companies.
For this to be done there must be delivered to the Registrar a written memorandum setting out:-
a. The firm name
b. General nature of business
c. Principal place of business
d. Particulars of limited partners and their contribution
e. Date of commencement etc. failing which the partnership becomes General.
2. Composition of Members: A limited partnership must have at least one general partner and one
limited partner.
3. Membership: A limited liability company may be admitted as a limited partner.
4. The Limited Partner: The liability of this partner is limited to the amount of capital contributed. He
cannot therefore be sued for debts or other liabilities of the firm.
Under Sec. 5 of their Limited Partnership Agreement; the Limited Partner is subjected to the
following incapacities: -
1. He cannot withdraw or receive back his share during the subsistence of the firm.
2. He does not bind the firm
3. He is not deemed to be an agent of the other partners
4. He may not take part in the management of the business and if he does, he becomes a general partner
for the duration and may be sued for debts and other liabilities arising.
5. His death, bankruptcy or insanity does not lead to dissolution
6. He cannot dissolve the partnership by notice.
7. A person may be admitted as a partner without the consent of the limited partner.
8. Differences between partners are resolved by a majority of the general partners.
9. The discharging of his interest by a court order for a private debt does not lead to dissolution.

3. Limited liability partnership

It is governed by the Limited Liability Partnership Act Chapter 30A.

An LLP combines some of the features of a traditional partnership (e.g. flexibility) with the Limited
Liability benefits more typically hitherto only associated with Companies.

LLPs were introduced to give professional services firms e.g. accountants, lawyers, surveyors etc the
opportunity to benefit from limited liability e.g. by protecting their personal assets from any potential
business creditors.

Many professional partnerships in Kenya have chosen to convert to LLP. It is not required that an LLP
creates a constitution/Memorandum or Articles of Association.

Partners to an LLP would (under the Act) execute a Limited Liability Partnership Agreement to set out
the agreement e.g. on profit sharing, capital contributions, roles/duties, management or other
arrangements amongst themselves and change those arrangements as often as they agree.

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An LLP is a body corporate and it is a separate and distinct legal entity from its partners.it is a hybrid
between a partnership and a limited liability company.

NB: The first two are governed by the Partnerships Act, the third one by Limited Liability
Partnerships Act.
Types of Partners
a) Active partners: These are partners who actively participate in the day-to-day operations of the
business are known as active or working partners. They contribute capital and are also entitled to
share the profits of the business. They are also liable for the debts of the firm.
b) Dormant partners –These are partners who do not participate in the day-to-day activities of the
partnership firm are known as dormant or sleeping partners. They only contribute capital and
share the profits or bear the losses, if any.
c) Nominal partners: These are partners that only allow the firm to use their name as a partner.
They do not have any real interest in the business of the firm. They do not invest any capital, or
share profits and also do not take part in the conduct of the business of the firm. However, they
remain liable to third parties for the acts of the firm.
d) Minor as a partner: a person under 18 years of age is not eligible to become a partner. However
in special cases a minor can be admitted as partner with certain conditions. A minor can only
share the profit of the business. In case of loss his liability is limited to the extent of his capital
contribution for the business.
e) Partner by estoppel: If a person falsely represents himself as a partner of any firm or behaves in a
way that somebody can have an impression that such person is a partner and on the basis of this
impression transacts with that firm then that person is held liable to the third party. The person
who falsely represents himself as a partner is known as partner by estoppel.

Example: Suppose in Heri Njema & Co firm there are two partners. One is Msee Mpoa, the other
is Hari. If Mnono- an outsider represents himself as a partner of Hari Njema & Co and transacts
with Boss then Mnono will be held liable for any loss arising to Boss. Here Mnono is partner by
estoppel.
f) Partners by Holding out -: When a person is represented (held out) as a partner and he does not
deny this even after becoming aware of it, he becomes liable to third parties who lend money or
grant credit to the firm on the basis of such representation.

Example: Suppose Simon tells Naomi in the presence of Jonah that Jonah is a partner in the firm
'Shipra Enterprises'. Jonah is not a partner and does not deny Simon’s statement.
Naomi grants a loan of SH. 50,000 to Shipra Enterprises on the impression that Jonah is a partner.
Later on the firm is unable to repay the loan. Jonah becomes liable to Naomi and here Jonah is a
partner by holding out.

Rights of partners
The rights and liabilities of partners are primarily governed by their partnership deed but if this is silent
on any particular matter reference is to be made to Sec 24 of the Partnership Act which lays down the
following rights between partners:
i) All partners are equal must share profits or losses equally.
ii) A partner is entitled to indemnity for any payment made or liability incurred in the ordinary
and proper conduct of the firm’s business.
iii) A partner is entitled to interest of 6% per annum on any money lent to the firm apart from the
original capital subscribed at formation.
iv) Every partner is entitled to participate in the management of the firm.
v) Each partner is entitled to oppose introduction of new partners.
vi) Each partner is entitled to have access to the firm’s books and other documents.

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 vii) On dissolution every partner has an equitable lien over the firm’s assets to ensure that they
are used to pay debts of the firm.
viii) On dissolution, after payment of debts every partner is entitled: -
a. To repayment of any loan made by him to the firm.
b. Payment of capital put to the firm.
c. To share in the residue in the same proportion as share in profit.
Duties of a partner:
1. To render true accounts: The partner must render true accounts of the partnership business. He
should permit inspection and provide information affecting the firm at all times.
2. Not to take any secret profit: Partner must account to his other partners any secret profit
received without the knowledge of the other partners resulting from the use of the partnership
business, and must not keep the profits for himself which is not known to other partners. Any
gain from any transaction concerning the partnership must be accounted for.
3. Not to compete with the business of the firm: This is allowing conflict of interests by carrying
out business similar to the firm’s. If a partner without the consent of other partners carries on any
business which competes with the business of the firm, he will be liable to account to the firm for
all profits made.
4. Every partner must use his knowledge and skills for the benefit of the firm.
5. To share in the losses: every partner is liable to the firm’s losses and other liabilities.
6. To act within authority: all the partners are bound to act within the scope of their actual or
implied authority. Where a partner exceeds the authority conferred on him, and the firm suffers
losses, he shall have to compensate the firm.
7. To act diligently: partners are bound to attend diligently to their duties in the conduct of their
knowledge and skill to the common advantage of the firm.
8. Duty to act: a partnership agreement is a contract of utmost good faith and thus every partner
must be just and faithful and should not obtain private advantage at the expenses of the firm
Implied Authority of a partner:
This is the authority a partner is presumed to have by virtue of being a partner in the firm.
Each partner is an implied agent of the firm and of other partners with power to bind them in contract.
This includes powers: -
1. To sell partnership assets/goods.
2. To purchase goods on credit for firm.
3. To accept money in payment of debt due to firm.
4. To hire employees and fire them
5. To borrow money, contract debts, pay debts on behalf of the firm.
6. To make, sign or endorse negotiate instruments in the firm’s name.
7. He may employ an advocate in an action against the firm for a trade debt.
Except if a partner has no such authority and the third party either knows that to be the case or he does not
believe him to be a partner.
Advantages of a Partnership
1. Specialization and division of powers: Where the association is profession oriented.
2. Sharing of management: All partners are entitled to take part in the firm’s management.
3. Wide capital base: this will assist in pooling together working and investment capital.
4. Easy to form: Formation is not subject to many legal formalities.
5. Flexibility: Partners are free to change the nature of business, provided all agree.
6. Sharing of Losses: Losses and Liabilities are shared amongst the partners thereby cushioning the
detriment.
Disadvantages of a Partnership
1. Liabilities of partners for debts and obligations of the firm is unlimited i.e. partners are liable to use
personal assets if the firm is insolvent.
2. Sharing of profits reduces the amount available to individual partners.

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3. A single partner’s mistake affects all partners.
4. Disagreements between partners often delay decision-making.
5. Tends to rely on a single partners effort to manage.
6. Death, bankruptcy, or insanity of a partner may lead to dissolution.
Comparison and Contrast between Companies and Partnerships
Companies Partnerships

Membership Private company; 2 -20

1-50 excluding employees.
Public company; minimum of 7
persons A partnership is unincorporated.
Legal persons A company is a corporation i.e.,
it is a body corporate.
Liability is generally unlimited.
Liability of members is limited
Liability by shares or guarantee

Have perpetual succession Death, bankruptcy or insanity of

a partner may lead to dissolution.
Existence
Have capacity to own property
Ownership of property Property is jointly held by all
By directors elected by members partners
Management
Companies are subject to the
provisions of the Companies Act By the partners themselves
Formalities
Directors are agents when they
contract on behalf of the Are not subject to any
Agency company strict legal formalities

Companies must have auditors

Auditors Each partner is an agent
of every other and the firm
Must hold A.G.M. every year
Meetings Are not obliged to have
Auditors

Are not obliged to hold any

meetings

Illegal Partnerships
Certain partnerships are deemed illegal e.g.
1. A partnership formed for an illegal purpose
2. A professional firm with unqualified partners
3. A partnership with more than 20 persons.
Relations between Partners and Third Parties
(Liability of Partners)
Every partner is an agent of each other and the firm. The liability of the partners for debts of the firm is
governed by the Law of Agency. A partner exercises both real and ostensible authority, and the firm is
generally liable for debts arising in the conduct of a partner.

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However, for the firm or other partners to be held liable for the acts of a partner, it must be evident
that:
1. The partner was acting in the business of the firm.
2. He was acting in the usual way.
3. He was acting in his capacity as a partner.
In other circumstances a partner would be held personally liable: E.g.
1. If he is prohibited from acting on behalf of the firm.
2. He signs a document without express authority
Liability of a Retiring Partner
Unless otherwise agreed, a retiring partner is only liable for debts and other liabilities upon the date of
retirement.
Liability of an Incoming Partner
Unless otherwise agreed, such a party is only liable for debts and other liabilities arising from the date he
became a partner.
Liability of a Minor Partner
A minor partner is not personally liable for debts and other liabilities of the firm. However, his share in
the property is liable. If a minor partner does not repudiate the partnership during infancy or within a
reasonable time after attaining the age of majority, he is personally liable for debts and other liabilities
from the date he became a partner.
Liability by Estoppel
A person, who is not a partner, may be held liable as a partner by the equitable doctrine of estoppel.
Under Section 18 of the Act, if a person who is not a partner knowingly permits himself to be held out a
partner or represents himself as a partner with the firms knowledge and third parties rely upon the
representation, he is estopped from denying the apparent partnership and he is liable.
Relations between Partners Themselves (Inter Se)
The relationship between partners inter se is governed by the agreement between them. However, a
partnership agreement is a contract uberrimae fidei (contract of the utmost good faith. Each partner is
entitled to utmost fairness from the co-partners.
The principal of utmost good faith in partnership is expressed the following ways:-
1. A partner with a personal interest in a transaction entered into by the firm is bound to disclose the
same.
2. Any secret profit made by a partner must be accounted to the firm.
3. A partner may not compete with the business of the form.
4. A partner can only be expelled from the firm in good faith.
Assignment
A partner may assign (transfer) his interest in the firm either absolutely or as a security for a loan. The
person to whom the interest is assigned (assignee) becomes entitled to the assigning partner’s share of
profit. He however does not become a partner.
Incapacities of an Assignee Partner
1. He cannot demand an account from the partners
2. He cannot take part in the management of the firm’s business
3. He has no right of access to the books of accounts

DISSOLUTION OF PARTNERSHIP
A partnership may be dissolved either with or without a court order.
Dissolution without a court order
A partnership may be dissolved without court order in the following circumstances:
1. Mutual agreement of partners. This may be at any time just like the formation.
2. Expiry of fixed time (if any) if the partnership was created for a fixed term.
3. Completion of venture for which the partnership was created.
4. Notice- Any partner may give notice to others of his intention to dissolve.

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5. Death, bankruptcy of one – (if the deed does not provide otherwise).
6. Exercise of option (a partner may pledge his shares for payment of personal debts).
7. Illegality – Event occurring to make the partnership business illegal.

Dissolution by court order

Any interested party may apply to court for dissolution of a partnership in the following circumstances: -
1. When a partner becomes of unsound mind.
2. When a partner becomes permanently incapable of performing his part of the contract.
3. When a partner is guilty of a conduct calculated to affect prejudicially the carrying out of the
business.
4. When a partner willfully commits a breach of partnership agreement.
5. If the partnership business is being carried out at a loss.
6. If the court thinks fit and just to dissolve. Example; in case where there are only two partners and
are not in talking terms for a reasonable time due to a dispute.