Legal Aspects of Business: Unlimited Partnership, Formation and Duties

This report provides a detailed examination of the legal aspects of unlimited partnerships. It begins by defining partnerships and specifically focuses on the characteristics of unlimited partnerships, including their formation, which can be informal or through a partnership deed. The report outlines the duties and obligations of partners in running the business, such as shared management responsibilities, the firm name, and the liability of partners, as well as the agency of each partner. Furthermore, the report discusses the termination of unlimited partnerships, including the various reasons for dissolution, such as death, resignation, or bankruptcy, and the procedures for winding up the business, including asset distribution and the settlement of debts and liabilities. The advantages of an unlimited partnership are highlighted, such as ease in raising funds and flexibility in management. The report concludes by summarizing key aspects of unlimited partnerships, providing a comprehensive understanding of their legal framework.

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Legal Aspects Of Business
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Introduction
Partnership maybe defined as the business association or relation that commonly formed
or it comes to existence when two or more persons wish to carry on business in common and
have a view of making profit. They must have a common business idea that they wish to put to
the test or have realized that their own skills and talents highly complement each other’s in such
a way that they might end up with a good business team or they become good business partners.
There can be a contribution of money (a capital investment in the business project) or services in
return for a share of the profits.
Parameters to be specified
1. Setting /starting an unlimited partnership
Unlimited partnerships do not have strict rules of formation. The partners are totally free to
decide on how to form their partnerships. This means you don't need to have anything written
down for a partnership to be formed...It does not matter if you do not intend to be a partnership;
if that's how you hold yourself out to the public, then your relationship will be deemed a
partnership, and all partners are held liable for obligations of the partnership. However, though
exceptional, they may form it in writing in which case the agreement that they enter into
becomes known as the partnership deed. Although there is no requirement for a written
partnership agreement, often it's a very good idea to have such a document to prevent internal
squabbling (about profits, decisions by the company and other factors) and give the partnership
solid direction.
Forming a partnership at times seems like the most logical option of which in some cases, it is.
An unlimited partnership as a legal structure for a new business is quite a good choice especially

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by the fact that it is some form of small business and has got a low turnover. In the formation of
an unlimited partnership, it may alternatively be formed in an informal manner through an oral
agreement and it may even be inferred from the conduct of the partners. This simply means that
the partners during the formation of a partnership may contain any terms that the partners may
deem fit.
In formation of partnerships, the minimum number of partners allowed is 2 whilst the maximum
number partners allowed are up to 20 members.
Even though there are no strict rules regarding formation of unlimited partnerships, every person
seeking to form a partnership needs to bear in mind certain matters:
i. To avoid future complicated conflict as regards the rights and obligation of partners it is
always advisable that the partners should conclude their contract in writing in the form of a
partnership deed(Greenwood, 2003).
ii. Partners should ensure that all the essential elements of the contract are present.
iii. Parties must exercise caution to ensure that the business they seek to engage in is not illegal
and also that there is not a prohibition in law for such contracts to be entered to by a partnership.
In the event that the business was originally lawful at the commencement of the partnership, if it
becomes unlawful during the subsistence of the partnership as a result of the change in the law
then the partnership must compulsorily come to an end. The risk of engaging in an illegal
business is that the partners will not acquire any rights as against each other and no rights against
third parties but 3rd parties acquire rights against the partners in so far as those rights are not
tainted in the parties.

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iv. In selecting partners, parties need to exercise caution and select partners with extreme care
because partnerships are built on mutual trust and confidence.
2. Running of an unlimited partnership
In the running of an unlimited partnership, there exist quite a number of duties and obligations
that need to be observed and which the partnership is associated with. To begin with, in an
unlimited partnership, the partners equally divide management responsibilities, as well as profits.
There must be a firm name through which a partnership is run. In an unlimited, contrary to the
requirement of setting out s manager, if not mentioned in the partnership agreement, the general
rule sets forth and which is that every partner sets in as the manager.
Regarding liability, there is no liability to members; this means that the partner to an unlimited
partnership is liable up to the last cent – they have unlimited liability for the debts to the
partnership.
Concerning agency, every partner is considered an agent to each of his co-partners in respect any
business relating to the partnership. In that context, any transaction that any partner enters into
will be binding to each and every of the co-partners and similarly binding to the partnership firm.
Each partner as an agent of the partnership has the power to bind the partnership to a contract.
Partners do not have the power to bind the partnership to contracts that are clearly outside the
scope of the business (Greenwood, 2003).
In unlimited partnerships, management is vested as a matter of rights in the hands of partners
themselves. Simply put, the partners are deemed to be two things in one, that is, they are owners
and managers at the same time.

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In terms of legal personality, unlimited partnerships do not acquire legal personality and as such
they remain one and same thing to mean that the partnership remains one thing with the owners.
In an unlimited partnership, creditors can sue you personally to repay business debts.
Taxes in partnerships are paid through the personal income - tax filings of individual partners. A
partner receives income through your share of the profits (or loss if the partnership is losing
money), and you report this income on your personal taxes. The partnership reports profits and
losses to the IRS on a special form and a partner pay the taxes on his portion (Jaffe, 1991).
3. Duties and liabilities in the termination of an unlimited partnership.
For an unlimited partnership, the rules of winding up or termination of a partnership are not
usually vigorous so that in the case that the partnership was form informally then it may similarly
be wound up in the same manner either by a conduct of any of the partners or through expression
of will of either of the partners to leave the partnership (Ribtein, 1992). Of partners want
partnership not to end easily, they can have a written agreement which outlines the manner
through which the partnership will be dissolved (Smith, 2011). For example, if they agree that a
partnership dissolves if certain specified event happens then it can provide a medium through
which the remaining partners can continue with the partnership.
Partnership may be terminated for a number of reasons which may include:
i. When a partner dies
ii. When a partner resigns or withdraws from the partnership
iii. When a partner becomes mentally incapacitated
iv. When a partner retires

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v. When one or more partners expel one of their co-partners
vi. When the partnership business files for bankruptcy
vii. When the partners agree to dissolve the partnership
viii. When the partnership business is illegal
ix. When a partner goes ahead to obtain a court order that the partnership must be terminated
because it can’t accomplish its intended economic purpose, or any other partner has made it
impossible to carry on the partnership business.
x. When one of the partners buys out all the other partners in which event the partnership
presumes being a sole proprietorship.
xi. If it was formed for a specific period, it stands dissolution upon expiry of that period.
xii. If it was formed for a particular adventure, it stands dissolution upon completion of that
adventure.
Once a partnership terminates the partners involved are no longer partners in the legal sense.
Nevertheless, the partnership might still continue for purposes of winding up the business.
Winding up a partnership involves selling off of assets belonging to the partnership, paying its
debts and distributing any money or property that remains to the partners or their heirs. For the
unlimited partnership, there is no need for a liquidator (Sobel, 1993). The partners are free to
dissolve the partnership by themselves.
As a general rule, every partner possesses equal rights after dissolution to participate in the
winding up process and to share in the distribution of its assets. If the dissolution may have

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occurred because of death of a partner then the surviving partners ordinarily have full power to
control and dispose of the assets. The partners may on agreement allow one or more of them to
have exclusive rights or authority to dispose the assets upon dissolution.
Once a partnership has been dissolved, the money is used for paying out debts that is owed to
creditors and the remainder is distributed amongst the partners. If money does not fit to pay the
debts, partners become liable and chip in to pay from personal funds (Epstein & Wissof, 1985).
At the time of winding up the affairs of the partnerships, the following rules apply depending on
the rules set by each region:
I. Every partner will have a right as against each other to have the assets of funds of the
partnerships apply in the following manner:
a. To pay off any liabilities and debts owing to third parties.
b. To pay to any partner what owes from the partnership to that particular partner.
c. If any surplus is to remain then it is to be shared out between the partners
In settling the accounts between the partners, the following two rules are to be observed:
a. If there are any losses then the losses must be taken care of first. The losses must first be
paid out of the profits of the business. If the profits are not enough, then they are to be paid out
of the capital. If the capital is also not enough, then every partner is liable to contribute towards
the settlement if the losses in the proportions to which they were entitled to share the profits.
b. That the assets or funds of the partnership will be distributed in the following manner and
order:

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i. To pay off third party debts and liabilities.
ii. To pay off any advances that a partner may have made in the partnership.
iii. If any assets or surplus remains then, they will be paid to any partner in respect of what a
partnership fund owes that partner.
iv. If any surplus remained then, it is to be divided among the remaining partners in the
proportions in which they were to share their profits.
The advantages and disadvantages of an unlimited partnership therefore are:
a) Advantages:
One of the advantages is that there will be ease in raising funds with more owners. Due the
nature of business, the partners are allowed by law to fund the business with the startup capital.
This simply means that the higher the number of partners in the partnership, the more the capital
that will be availed. This, therefore, allows a better, flexible and more potential for growth of the
unlimited partnership. It also means the partnership will result in the most potential profit that
will be shared equally among the partners.(Horowitz, 1939)
An unlimited partnership is easy to establish, or it can be said to be flexible. This simply means
that the partnership is easy to form, manage and run. The unlimited partnerships are less strictly
regulated in terms of the laws that govern the formation and because are the determinants of how
the business should operate they are as such far way more flexible concerning management and
making decisions by the partners.
Partners can combine their forces and as a result complement each other and by such they tend to
strengthen up the partnership. Simply put, they enjoy the advantage of shared responsibility in

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the running of the business (Horowitz, 1939). This, therefore, allows partners to make the most
out of their abilities. The partners may as well split the tasks according to their respective skills
rather than splitting the tasks and taking each an equal share of the management. If for example
one of their partner is good at record book keeping and accounting then he can take tasks that
deal with such while the rest of partners distribute other tasks.
Finally, there is the advantage of decision making whereby partners do share the decisions they
make which help them to solve out issues whenever called upon to. The more the partners, the
more the brains in the partnership and as such the business ideas flow out easily thus efficiency
in which the output observed are positive. The business grows apprehensively.
Another advantage is that the profits of the partnership go directly to the pockets of the partners
and as such the reporting and payment of taxes is made easier.
B) Disadvantages
One of the most terrific disadvantages is that the partners are personally liable for the debts that
arise out of the carrying on of the business. Unlimited partnerships are subject to unlimited
liability which implies that each of the partners shares the liability and risks financially that arise
out of the business activities.
There is also the sharing of profits equally despite the amount of effort put in by either of the
partners. It is inconsistent as regards fair share of effort put in running or managing the business.
One may reap rewards that are not proportional to the amount of effort he put in while managing
the business.

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The partners to an unlimited partnership are subject to the actions that arise out of their co-
partners even if they were not the party to the occurrence of the event.
Another disadvantage is that the partnership is limited to life. Such that if one partner leaves or
dies then, the partnership can be terminated
Making decisions in a shared manner implies that no one has the ability to make full independent
decisions on their own and such leads to disagreements amongst the partners or may even result
in some paralysis of the partnership in the case in which they fail to agree with a common
decision. Disagreements between the partners obviously arise out of differences in opinions as no
one is allowed to do the best interest at heart. They are all limited to making a similar decision.
This is one of the reasons why it is advisable at times to draft partnership deeds that help solve
problems arising out of disagreements.
Finally, one of the major disadvantages noted in an unlimited partnership is the one provide by
taxation laws that partners are required to pay tax in the same way as sole traders. Each partner is
required to submit a self-assessment of the tax return for each year.
Selecting purpose and name of my business
The purpose of my partnership would be to allow me and my partners to make elaborate
decisions that will see us make lots of profits from the business idea we intend to share.
The name of our business will be Shah and co. enterprises.
There are quite a number of factors that business managers and owners must take into
consideration and in forming partnerships that can see to it that a partnership runs smoothly and

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becomes successful. These factors would enable them to build a partnership with capacity, skills,
and capabilities. Among them may include:
One such factor includes establishing perfect partnership relationship among the quantifiable
number of partners available. It is important that business partners should be good leaders and as
such should evaluate and review their progress of their partnership. Partners should set dates in
which they will meet through which they will meet targets and ensure they achieve positive
results. Through such the partnership can be fruitful and see great amounts of profits. Partners
should have a procedure and time on when to withdraw from their partnership and when to part
ways so as to ensure mutual benefits. Being in a partnership should be for a beneficial reason
(Pahr & Speckman, 1994).
Partners should manage risks. Two issues should be highly considered; risk development and
effective business development. The two should be highly monitored. Partners should ensure that
they have an effective method of dispute resolution when there arise disagreements. As such
partners will learn on how to resolve conflicts and manage their risks so as to achieve a positive
result from their partnership. It is by noticing this risks ad their probable causes that the partners
can be able to prevent them even from occurring repeatedly.
Business can also be successful by creating commitments to the partnership. This commitments
and agreements that are established by partners usually form the basis through which any
successful alliance in a partnership sprouts. Employing a common joint effort creates agreements
that target mutually profitable schemes. It is through understanding that partners allocate roles,
accountability and responsibility and primary objectives are achieved.

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A time frame should be established for purposes of completion of tasks. This returns the favor of
seeing the partners appearing organized and skillful (Pahr & Speckman, 1994)
Partnerships should also have realizable and realistic expectations or objectives. This is achieved
through communication which is an extremely important aspect of a partnership. Partners should
spell out their expectations so that if there are any issues they can be ironed out in advance
before they grow into the extent of making the partnership be wound up. This may benefit the
interest of every individual or partner in the business through sharing skills and knowledge.
Finally, having a common understanding or goal that your partnership is driven by would ensure
a successful business. Successful partners are established and maintained by having a common
focus and beneficial goals or objectives. Most important is to ensure compatibility of the
partners. Partners will be successful if they ensure they share a common value base and vision.

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REFERENCES
Horowitz, C., 1939. Disregarding the Entity of Private Corporations. Wash. L. Rev. & St. BJ, 14,
p.285.
Ribtein, L.E., 1992. Deregulation of Limited Liability and the Death of Partnership, The. Wash.
ULQ, 70, p.417.
Epstein, M.H. and Wisoff, B., 1985. Winding Up Dissolved Law Partnerships: The No-
Compensation Rule and Client Choice. California Law Review, 73(5), pp.1597-1642.
Sobel, J.M., 1993. Rose May Not Always be a Rose: Some General Partnership Interests Should
Be Deemed Securities under the Federal Securities Acts, A. Cardozo L. Rev., 15, p.1313.
Jaffe, J.F., 1991. Taxes and the capital structure of partnerships, REIT's, and related entities. The
Journal of Finance, 46(1), pp.401-407.
Smith, B., 2011. Interplay between Registered and Unregistered Domestic Partnerships under the
Draft Domestic Partnerships Bill, 2008 and the Potential Role of the Putative Marriage
Doctrine, The. S. African LJ, 128, p.560.
Greenwood, R. and Empson, L., 2003. The professional partnership: relic or exemplary form of
governance?. Organization studies, 24(6), pp.909-933.
Jaffe, J.F., 1991. Taxes and the capital structure of partnerships, REIT's, and related entities. The
Journal of Finance, 46(1), pp.401-407.
Strausz, R., 1999. Efficiency in sequential partnerships. Journal of Economic Theory, 85(1),
pp.140-156.

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Mohr, J. and Spekman, R., 1994. Characteristics of partnership success: partnership attributes,
communication behavior, and conflict resolution techniques. Strategic management
journal, 15(2), pp.135-152.