Business partnerships

 September 2018

Fact sheet no. BDL08 SCOT Business partnerships

What this fact sheet covers

This fact sheet tells you about how to deal with debts when you run a partnership. A partnership is a business where two or more people carry on a business to try and make a profit.

Use this fact sheet to:

  • find out whether a partnership exists;
  • understand who is liable for a partnership’s debts;
  • learn how to deal with partnership debts if there is no spare money available; and
  • learn how to deal with partnership debts if there is some spare money available.

What is a partnership?

When two or more people carry on a business to try and make a profit, it is known as a partnership. The word ‘firm’ is also used to refer to a partnership in Scotland. We use both terms in this fact sheet.

In Scotland, a partnership is a distinct legal entity that exists separately from its partners. A partnership can own property and have its own rights and duties.

A partnership must have at least two partners. The firm is known as the ‘principle’ and the partners as its ‘agents’.

How do I know if a partnership exists?

When deciding whether a partnership exists, the Partnership Act 1890 applies.

Some partnerships are set up on the basis of a partnership agreement signed by all of the partners. A partnership agreement is normally prepared by a solicitor and usually includes information about:

  • how the profits and losses should be shared;
  • who has the authority to enter into contracts on behalf of the firm;
  • whether salaries will be paid;
  • how much of the firm’s debts each partner agrees to pay; and
  • the circumstances in which the partnership will be dissolved (closed).

What if there is not a written partnership agreement?

If there is no written agreement, it can be difficult to know whether a partnership exists. The Partnership Act 1890 states that if more than one person receives a share of the business profits, this is good evidence that the business is a partnership. The way that the business completes its income tax returns is also important. If you are unsure whether your business is a partnership, contact us for advice.

Liability for partnership debts

Information:

liability for tax

Partners are not jointly and severally liable for income tax. Each partner must pay income tax on their own share of the firm’s profits.

In general, creditors will first ask the firm to pay its debts. If the firm cannot pay, the creditors are likely to ask the individual partners to pay. Partners are ‘jointly and severally liable’ for the firm’s debts. This means that the firm’s creditors can take action against any partner. Also, they can take action against more than one partner at the same time. This applies even if there is a partnership agreement that says otherwise. If one partner pays more than their agreed share of the firm’s debts, they can recover the money that another partner should have paid by taking court action against them, if necessary. 

A person who joins a partnership will not be liable for the debts it built up before they joined, unless an agreement is made that says something different.

A person who leaves a partnership will still be liable for the firm’s debts that were built up before they left.

A person who leaves a partnership may still be liable for any debts the firm builds up after they leave. However, they will not be liable if:

  • they have agreement to this from the creditors and other partners; and
  • their name is removed from the firm’s stationery.
If a partner dies or is sequestrated (made bankrupt), the partnership and creditors can claim the deceased partner’s share of the debt from their estate.

Information:

silent partners

A ‘silent’ or ‘sleeping partner’ does not take part in the day to day running of the business. However, they are still jointly and severally liable for the firm’s debts and they have the same fiduciary relationship with the firm.

All partners have a ‘fiduciary relationship’ with the firm. This means that all their actions must be in the best interests of the firm and the other partners. All partners are liable for the actions individual partners take on behalf of the firm.

Partnership debt options

If your firm is struggling to pay its debts, consider whether it can negotiate with its creditors and trade through its financial difficulties. To do this, you will need to complete a business budget sheet outlining the firm’s income and outgoings. You may need help from your accountant as you will need to look at the average income for the firm (normally over a period of between the last 3 and 12 months) as well as its outgoings. The firm may also need to budget for income tax on its profits and value added tax (VAT).

If the firm is making a profit after all its outgoings have been taken into account (a ‘net’ profit), consider whether offers can be made to its creditors.

Net monthly profit available

Informal negotiation

Use your budget to show how much money is available and how much the firm can offer to its creditors. Business Debtline can help you to complete a partnership budget sheet. Contact us for advice.

Consider which debts are priority and which are non-priority. Priority creditors have stronger powers to get their money back. Our self-help pack gives information about this. Contact us for a copy on 0800 197 6026. If you are unsure of the type of debt your firm has, contact us for advice.

Trust deeds

A trust deed is a formal agreement with creditors to repay them part of what is owed. A firm can enter into a trust deed. It is common for the individual partners to enter into a trust deed themselves, alongside the firm. This is because a firm trust deed would normally only pay back some of the debt. Once a firm trust deed has finished, the individual partners would be liable for the remainder of the debt and would be expected to pay it back. If the individual partners also entered into a trust deed, this debt would be dealt with.

Protected trust deed

Remember:

assets

A firm trust deed will include the debts and assets of the firm, which may affect the firm’s ability to trade. An individual trust deed will include the debts, and possibly the assets, of the individual. Contact us for advice.

Unless a trust deed becomes a protected trust deed, creditors that do not agree to the terms will not be bound and could take further action. However, for it to become protected, the trust deed has to be added to the Register of Insolvencies. This is a public register. This could make continuing to trade difficult if creditors or the firm’s bank do not want to do business with the firm anymore.

Once a protected firm trust deed is granted, the trustee can take control of the firm’s assets. This gives them an opportunity to allow the business to continue to trade.

The trustee can:

  • stop the firm from trading;
  • give permission for someone else to run the business; or
  • sell the business as a going concern. ‘Going concern’ means that a partnership is trading and intends to continue trading.

The trustee will only allow the firm to continue trading if this is the only way to guarantee a return for the creditors. If the trustee feels that the business should continue to trade, they can allow the partners to take on the majority of the running of the business. However any important decisions would have to be approved by the trustee.

See our fact sheet:

Trust deeds

Entering into a trust deed or protected trust deed can make it very difficult to continue trading because it will be marked on your credit reference file for six years.

No net monthly profit available

Ceasing to trade

If a firm is insolvent, it means that:

  • it cannot pay its debts as they fall due; or
  • the value of its assets is less than the total debt that it owes.

Ask your accountant for help with drawing up a balance sheet of the firm’s assets and debts.

A firm will also be considered as insolvent if it has received a ‘charge for payment’ or ‘statutory demand’ and the time limit stated has run out. A charge for payment and statutory demand are both formal demands for money that may be sent by creditors at different stages in the process of collecting a debt.

If you are unsure whether your firm is insolvent, contact us for advice.

If you think that your firm is insolvent, you may need to consider ceasing to trade. If you do decide to cease trading, take the following actions.

See our fact sheet:

Income tax debt

  • Inform Her Majesty's Revenue & Customs (HMRC) for income tax purposes. You will need to complete a final tax return. This cannot normally be done until the 5 April after the date the firm ceases trading. If you have an arrangement in place to pay your income tax, tell HMRC this when you inform them that you have ceased trading. This is because you may not be able to continue making the agreed payments. If necessary, renegotiate your payments based on your new circumstances. It is usually easier to negotiate these repayments after you have ceased trading. Contact us for advice.
  • If you are registered for VAT, you also need to inform the VAT department at HMRC that you have ceased trading. You will need to ‘de-register’ for VAT and complete a final return. It is usually easier to negotiate an arrangement to repay VAT after you have ceased trading. Contact us for advice.
  • If you trade from business premises, check your lease or tenancy agreement to see if you can end it. If you are able to end it, give your landlord the correct written notice. If you are tied into the lease or tenancy, speak to your landlord about transferring it to someone else. If the landlord does not agree to this, they may be able to ask you to pay rent for the remaining term of your lease or tenancy.
  • Tell the local authority that you have ceased trading for business rates purposes. If you are no longer the tenant or occupier of a property, you may not have to pay business rates for it. If the property is empty and you are still liable to pay business rates, you may be entitled to a discount.
  • Tell the firm’s gas, electric and water suppliers that you have ceased to trade and give them final meter readings. Ask for final bills.
  • Check your telephone and equipment lease agreements to see if you can terminate them. You may need to give written notice. If you cannot terminate these agreements, ask for final bills and contact us for advice.
  • Inform any other creditors that the firm has ceased trading. Ask for final invoices and make arrangements to clear any remaining debts.

See our fact sheet:

Commercial property leases

See our fact sheet:

Business rates

Closing a partnership

If you do cease trading, you may want to formally dissolve (close) your partnership. Any partner can dissolve a partnership by giving a ‘notice of dissolution’, which takes effect straight away. This notice does not have to state the reason for the dissolution.

When the partnership is dissolved, its assets will be sold to raise money to pay creditors. If anything is left over, it should first be paid to partners who have lent money to the firm and then shared between all the partners. If the firm’s assets are not worth enough to clear its debts, the partners will be liable for the debts that are left. The partners would need to make their own personal arrangements with these creditors. If you need more advice on how to deal with these types of debts, contact us for advice.

Bankruptcy

Bankruptcy is a court order which ends liability for most debts and means that assets may be sold to raise money to pay creditors.

A firm can make itself bankrupt. It will need the agreement of a creditor to do this and will also need to show that it is apparently insolvent.

If the partners, or any creditors, want to do this they will need to petition for the partnership to be made bankrupt and then petition for all of the individual partners to be made bankrupt.

See our fact sheet:

Bankruptcy

If one partner is declared bankrupt, then the whole partnership is dissolved. An insolvency practitioner (known as the trustee) may be appointed. They can use the firm’s assets to pay off the partners’ personal debts. For more information on bankruptcy, contact us for advice.