The following important differences exist between a registered company and a partnership.
(a) The method of formation
All companies must be registered in accordance with the procedure laid down in the Companies Act 1985 (from 2009 the 2006 Act).
'Any two or more persons associated for a lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability'.
In relation to the formation of an ordinary partnership there are no formal registration requirements which must be followed under the Partnership Act 1890. Although no formalities are required for a partnership to be formed in direct contrast to registered companies, a partnership deed is often drawn up to cover the rights and
responsibilities of the partners during the term of the partnership and also on its dissolution. If there is no deed of partnership, the Partnership Act 1890 governs the legal relations between the partners.
(b) The need for a written constitution
In accordance with the Companies Act 1985 (from 2009 the 2006 Act) a company must have a written constitution i.e. a memorandum of association and articles of association. A partnership agreement need not be in writing although in the vast majority of cases it will be evidenced in writing.
(c) Separate corporate personality & its legal implications
Following incorporation, a company is a body corporate with a separate corporate personality and amongst other things can be sued in its own name as a separate legal party from its members, in the event of a breach of contract by it. This legal principle was established by the case of Salomon v. Salomon & Co. Ltd. (1897). On the registration of a company's memorandum of association, the Registrar of Companies issues a company with a certificate of incorporation, identifying clearly to outsiders that the company is a corporate body and that the liability of its members is limited. From the date on the certificate of incorporation the subscribers of the memorandum, together with such other persons as may from time to time become members of the company, [link to perpetual succession] become a body corporate by the name contained in the memorandum.
A partnership is not a corporate body and does not have a separate corporate
personality i.e. the members and the firm are for legal purposes the same person and can be sued directly e.g. in the event of a breach of contract; this is one of the major differences between a firm and a company. In the event of a partnership business failing and the assets of the firm being insufficient to pay creditor's debts, the personal assets of the firm's partners can be seized, which could lead to a partner being declared bankrupt.
(d) Agency
The concept of agency is central to the understanding of company commercial
transactions. In a company, mere membership does not of itself invest the shareholder with the power to act as an agent for and on behalf of the company. In companies directors act as agents, deriving their authority to do so from the company's articles of association; the principal in the agency relationship being the company's constitution. Agency powers are contained in the company's articles of association and these powers are the principal agency relationship source i.e. they state whose acts will be regarded as those of the company. The articles will normally grant full agency powers to the board of directors who are required to exercise this power bona fide in the interests of the company, a fiduciary obligation. They are also under a duty to exercise care and skill when entering into contracts on behalf of the company. The standard of care and skill they are required to demonstrate is the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company.
In ordinary partnerships all partners are agents of the firm in the absence of an agreement to the contrary. The Partnership Act 1890 s.5 defines the scope of an agent's apparent authority, in relation to the power of a partner to bind his firm.
'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'
The scope of a partner's authority to bind his firm in contractual agreements is a matter which is usually regulated by a partnership agreement i.e. not all partners may have apparent authority to act as agents of their firm.
(e) Limitation of liability of members
In a company limited by shares the financial liabilities of the business, such as trading debts, end when members have fully paid for their shares together with any share premium. Essentially, all the shareholders of a company will have limited liability in the absence of grounds justifying the drawing aside of the corporate veil by the courts or the judiciary.
The liability of partners for the debts of the firm on dissolution is unlimited, in the absence of an agreement to the contrary. If the assets of the firm are insufficient to meet the liability, the creditor can look to the personal property of the individual partners. To this end, all the partners are said to be 'jointly and severally liable' with the firm (Section 9, Partnership Act 1890) which means that each partner is responsible for the whole of the firm's debts; a situation which may result in bankruptcy proceedings being brought against the firm's partners.
(f) Management structure
In a company there is a separation of equity ownership and control. A company is managed by those empowered to do so under its articles of association, its board of directors. The means available to company members, to require directors to account for their actions are, therefore, of critical importance and company law in the interests of democracy provides that certain decisions, such as alterations to the articles or memorandum, can only legitimately be carried out in general meeting of the company. In a partnership there is no separation of ownership of control, in the absence of an agreement to the contrary. Under Section 24 of the Partnership Act 1890 all partners have the right to participate in the management of their firm and this statutory provision will operate in the absence of an agreement to the contrary.
Denial of this right of a partner to participate in the management of the firm would be grounds for dissolution on 'just and equitable' grounds in accordance with Section 35 of the Partnership Act 1890. The relationship between partners of a firm is uberrimae fidei and such denial amounts to a breach of mutual trust and confidence.
(g) Membership
A company continues to exist even when its members change or die, because of perpetual succession. Company members can enter and leave a company fairly easily, just by buying and selling their shares. One advantage of this is that the deeds to company property do not need to be altered when the membership of the company changes, unlike the situation, which exists in partnerships. The shares in a company are normally freely transferable in accordance with a company's articles of association. In the absence of a partnership agreement to the contrary the firm will be dissolved when one of its partners leaves or dies i.e. a partnership does not have perpetual succession. Moreover, a new partner cannot join the partnership without the consent of all the existing partners. This highlights the nature of a partnership as a joint venture
based on utmost trust; a partnership relationship is uberrimae fidei. In the absence of an agreement to the contrary the shares in a partnership are not freely transferable.
(h) Borrowing
A company can raise loan capital by issuing debentures (debt secured by means of a floating or fixed charge on the company's assets).
A partnership cannot issue debentures secured on the firms' assets.
(i) Formalities and public inspection
A company must file with the Registrar of Companies a wealth of detail about itself on a regular basis. Moreover, on the payment of a nominal fee all of this information is open for public inspection. Thus its membership, its annual accounts and details of the property it has charged, are amongst the long list of details, with which the Registrar must be provided; all documents on receipt becoming public documents. Thus there is a considerable internal administrative burden associated with the preparation of such documentation in line with the requirements of Companies legislation. Furthermore, financial penalties can be exacted against companies in default – persistent default can lead to directors incurring criminal liability – the consequences of which are
imprisonment and/or disqualification of a company director in accordance with the Company Directors Disqualification Act 1986.
A firm by direct contrast to a company can maintain complete secrecy over its affairs (other than providing details of its proprietors where the Business Names Act 1985 applies) – one of the main advantages. A partnership must register under the Business Names Act 1985 any name it uses to trade under which does not consist of the
surnames of all the partners, this name e.g. Smith & Co.
(j) Termination
A company cannot be wound-up without statutory intervention. Since a company has been created by statutory intervention, namely by the Companies Act 1985 (from 2009, the 2006 Act) its termination is also regulated by statutory intervention, namely by the Insolvency Act 1986. A company will not normally be required to be wound-up on the grounds that one of its members has died or been declared bankrupt.
A partnership may be dissolved without statutory intervention. For example, in the absence of an agreement to the contrary, a partnership will be dissolved on the death or bankruptcy of a partner.
(k) The Articles of Partnership
As a general rule, the partnership comes into being by means of an agreement in writing, the document being known as the Articles of Partnership. This will be signed by all the partners and contain all the conditions, etc. under which the partners intend to carry out their business.
The Articles of Partnership usually include clauses dealing with the nature of the business; its capital and property and the respective capitals of each partner, the method of sharing profits and losses and the rules as to interest on capital and drawings.
Provision is also often made for the method of determining the value of goodwill on retirement or death, and of computing the amount payable to an outgoing or deceased partner. The partners are bound by the Articles and if any point is not addressed within them, the Partnership Act applies.
The facts in Greenaway v. Greenaway (1939) were that under the Articles of
Partnership a partner was liable to be expelled if he acted in a manner contrary to the good faith required of partners and prejudicial to the firm's general interest. For a long
time there was considerable acrimony between two of the partners, which eventually came to a head when one assaulted the other. It was held that his expulsion was justified, since his assault was an act of disloyalty and constituted conduct which was clearly contrary to the good faith required of partners.
(l) Registration – the firm name
A partnership is not subject to registration, unless it is a limited partnership.
Legally, the firm's name is merely a convenient way of alluding to existing partners. An authority to lend to a firm does not authorise a loan to that firm when the partners have changed, but copyright can be registered in a firm's name. The firm's name will be protected. Partners can sue and be sued in a firm's name, although they must appear in person.