Law of Partnership

Law of Partnership

 

Partnerships are one of the more common modes of business operation in Malaysia. There are many partnerships in the country. Partnerships are formed to operate concerns varying from trading firms to professional firms (e.g. legal, accounting and medical practices). A basic knowledge of the law governing partnerships is important to bankers, accountants and the business community as a whole. The law of partnership is governed by the Partnership Act 1961 (Revised 1974).

Forming a Partnership

Here are the general steps you need to follow in order to form a partnership in compliance with applicable laws. Make sure to consult your state page for state-specific details.
1. Choose a business name for the partnership and check for availability.

• Please see our section on choosing and checking the availability of a name for your small business, as well as our section on the trademark law aspects of choosing a name.

2. Register the business name with local, state, and/or federal authorities.

• If you will be operating a partnership under a business name that is different from the partners' names, then you will need to register the name as a "fictitious" or "assumed" business name (sometimes also called a "trade name" or a "doing business as" filing). In most states, you do this at the local level by registering with the county clerk's office in the county where the business is located. In other states, you may have to register with the Secretary of State or another state agency in addition to registering at the local level. For more on the requirements of state law, see the State Law: Forming a Partnership section. Fees and procedures may vary from location to location, so you should contact your county clerk's office for specifics.

• Although you are not required to do so, you should consider registering your business name as a federal and/or state trademark.

3. Negotiate and execute a partnership agreement.

• This step is not legally required, but it is highly advisable that partners execute a formal agreement.

4. Obtain any required local licenses.

• As a business doing journalism, you are not required to obtain any federal or state licenses or permits relating to carrying on a particular trade. Most local or city governments, however, require every business to obtain a basic business license, sometimes called a tax registration certificate. You get this license from your city or county. The best way to get information about fees and procedures is to contact your county or city clerk's office or other local government authority. The local chamber of commerce and other small business owners might also be a good resource for information regarding local licenses and/or permits.

5. Determine what tax obligations the partnership has, and take care of any necessary registrations.

• Partnerships need to apply for an Employer Identification Number (EIN) from the IRS. There is no filing fee. You can apply for an EIN:
  • by submitting the required information online at the IRS's website. The EIN is issued immediately once the application information is validated;
  • by telephone at 1-800-829-4933 from 7:00 a.m. to 10:00 p.m. in your local time zone; or
  • by mailing or faxing Form SS-4, Application for Employer Identification Number. Instructions for Form SS-4 are available on the IRS website.

• If your partnership has an employee or employees (other than the partners), you likely will need to obtain a state employer identification number or account for tax purposes. You will also have to report any new hires as you make them..

• You should be aware that, as the owner of a small business, you may be subject to additional federal, state and local taxes and informational filing requirements, such as self-employment taxes and employment with holdings and filings.

• Although a partnership generally does not pay federal income tax at the entity level, it must file an information return, Form 1065, annually with the IRS. This return shows the partnership's income, deductions, and other required information, and must include the names and addresses of each partner, and each partner's distributive share of taxable income.

6. Open a bank account for your business.

• It is a good idea to keep your business's finances separate from your personal accounts. A good way to do this early on is by opening a bank account for your business. You will probably need a Tax ID number (EIN) and either a copy of the partnership agreement or your "fictitious" business name filing indicating the partners' names.

Relations between Partners to One Another

The relations between partners to one another are determined by their partnership agreement. The partnership agreement normally provides for the rights and duties of the partners, the conduct and management of the firm, the capital and their profit-sharing arrangement. The Partnership Act 1961 applies in the absence of provisions being made under the agreement. In Malaysia, it is common for there to be no written partnership agreement and provisions in the Partnership Act 1961 would therefore apply unless the partners have orally agreed on those provisions.
The interests and duties of partners in the absence of agreements to the contrary are provided for in section 26 of the Partnership Act 1961 which states as follows: Rules as to interests and duties of partners, subject to special agreement.
26. The interests of partners in the partnership property, and their rights and duties in relation to the partnership,” ‘shall be determined, subject to any agreement, express or implied, between the partners, by the following rules:
(a) 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;
(b) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him
(i) In the ordinary and proper conduct of the business of the firm; or (ii) in or about anything necessarily done for the preservation of the business or property of the Firm;

(c) a partner making, for the purposes 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 eight per cent per annum from the date of the payment or advance;
(d) A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him;
(e) Every partner may take part in the management of the partnership business;
f) No partner shall be entitled to remuneration for acting in the partnership business;
g) No person may be introduced as a partner without the consent of all existing partners; ti) 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; and (i) the partnership books are to be kept at the place of business of the partnership (or the principal place, if there are more places than one) and every partner may, when he thinks fit,
The above rules apply in the absence of an agreement to the contrary. The priciple of utmost good faith between partners is implicit in every partnership agreement and is a prime requisite in relations between partners. This is because the relationship between partners is based on mutual trust and confidence

Partnership Property

Partnership property has been defined in section 22(1) of the Partnership Act 1961 as:
All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise on account of the firm or for the purposes and in the course of the partnership business,... and must beheld and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement provided that the legal estate or interest in any land which belongs to the partnership shall devolve according to the nature and tenure thereof and the general rules of law applicable thereto but in trust, so far as necessary, for the persons beneficially interested in the land under this section. From the second limb of section 22(1), Partnership Act 1961, as stated above, it is clear that partnership property must be used and applied for the purposes of the firm and in strict accordance with the partnership agreement.

DISSOLUTION OF PARTNERSHIP

 

A partnership 'dies' when it is dissolved. Dissolution of partnership may happen in various circumstances and its consequences not only affect the partners themselves but third parties (e.g. financial institutions and merchants) dealing with them.

Ways in which a Partnership is dissolved:

A partnership may be terminated or dissolved in the following ways:
1- By agreement:
(a) if duration of the partnership has been specified in the partnership agreement, the partnership is terminated on the expiry of that period;
(b) if the partners mutually agree to dissolve the partnership.
2- By operation of law (unless otherwise agreed between the partners)
(a) if the partnership was entered into for a fixed term and the term expires— section 34(l)(a), Partnership Act 1961;
(b) if the partnership was entered into for a single adventure or undertaking, and that adventure or undertaking terminates—section 34(l)(b), Partnership Act 1961;
(c) if the partnership was entered into for an undefined time, by any partner giving notice to the other partner(s) of his intention to determine (or end) the partnership—section 34(l)(c), Partnership Act 1961.
3-By death or bankruptcy (unless otherwise agreed between the partners—section
35(1), Partnership Act 1961,
4- By charging on shares—section 35(2), Partnership Act 1961.
5- By supervening illegality—section 36, Partnership Act 1961.
6- By court order—section 37, Partnership Act 1961.
The full text of sections 34 to 37, Partnership Act 1961, which state the various ways in which partnerships can be dissolved, is as follows:

Dissolution by expiration or notice.

.34. (1) Subject to any agreement between the partners, a partnership is dissolved:
(a) If entered into for a fixed term, by the expiration of that term;
(b) If entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or
(c) if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership.
(2) In the last-mentioned case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or if no date is so mentioned, as from the date of the communication of the notice.

Dissolution by bankruptcy, death or charge.

35. (1) Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.
(2) A partnership may, at the option of the other partners, be dissolved if any partner suffers his share of the partnership property to be charged under this Act tor his separate debt.

Held: Allowing the plaintiffs' application:
1. Upon the true construction of section 35(1) of the Partnership Act 1961, the agreement made between the partners to the contrary must have been made before the death of any partner. An agreement made by the surviving partners after the death of a partner without the agreement of the deceased partner will not bind the deceased partner nor will it make the partnership a continuing partnership.
2. On the death of any partner, a partnership therefore stands dissolved un-less there is evidence that the partners had agreed otherwise. The onus is on the defendants to prove not only the existence of an agreement between the surviving partners but the existence of an agreement between all the partners including the deceased partner. (This is so because by the death of ' the partner it is no longer possible to adhere to the original contract, the essence of which must be that all parties to it must be alive.)

Dissolution by illegality of partnership.

36. A partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership.

Dissolution by the court,

37. On application by a partner, the court may decree dissolution of the partnership in any of the following cases:
(a) when a partner is found lunatic or is shown, to the satisfaction of the court, to be of permanently unsound mind, in either of which cases the application maybe made as well on behalf of that partner, by his committee, or next friend, or person having title to intervene as by any other partner;
(b) When a partner, other than the partner suing, becomes in any other way permanently incapable of performing his part of the partnership contract;
(c) when a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the court, regard being had to the nature of the business, is calculated to affect prejudicially the carrying on of the business;
(d) when a partner, other than the partner suing, wilfully or persistently commitss a breach of the partnership agreement or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him;
(e) When the business of the partnership can only be carried on at a loss; and
(f) Whenever in any case circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved. In other words, a partnership may be dissolved, without the order of court, in the following ways:
1- By agreement 2- By operation of law 3 - By death or bankruptcy 4- By charging on shares
5- By supervening illegality
The court may order the dissolution of the partnership, on application by a partner, in any of the following cases:
1- Insanity of a partner: Section 37(a), Partnership Act 1961
2- Permanent incapacity of any partner to perform his duties: Section 37(b), Partnership Act 1961
3- Conduct calculated to pre-judicially affect the carrying on of the business: Section 37(c), Partnership Act 1961.
Notice of Dissolution
Unless notice of dissolution is given, all customers of the partnership are entitled to treat all the former members as continuing to be members. Section 39 of the Partnership Act 1961 states:
On the dissolution of a partnership or retirement of a partner, any partner may publicly notify the same, and may require the other partner or partners to concur tor that purpose in all necessary or proper acts, if any, which cannot be done without his or their concurrence. Notice may be given by an advertisement in a local press, gazette or by a circular letter. However, for old customers and clients of the partnership, an advertisement in a gazette alone is not sufficient notice.