Question

Newly graduated from medical school, David and Mary have decided to take over a medical practice together in Saltbush, a small NSW country town. This decision was made after seeing the official announcement of the retirement of its two elderly doctors and the closure of their Saltbush practice. David and Mary have no plans to expand in the future but are wondering whether a partnership is the best legal structure for their business. Please advise the following: i. How does the law regulate partnerships? ii. Describe the advantages and disadvantages of a partnership structure . iii. David and Mary discover that the retired doctors operated the Saltbush business as a partnership for over 40 years and had incurred a number of large debts that remain unpaid. If David and Mary take over the medical practice advise if they will be liable for these debts .

Answer 1

A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations. Organizations may partner to increase the likelihood of each achieving their mission and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a contract.

i) Legal Regulation of Partnerships:

Setting up a partnership is more complex than setting up a sole proprietorship, but it’s still relatively easy and inexpensive. The cost varies according to size and complexity. It’s possible to form a simple partnership without the help of a lawyer or an accountant, though it’s usually a good idea to get professional advice. Professionals can help you identify and resolve issues that may later create disputes among partners. The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business.

MODE OF DETERMINING EXISTENCE OF PARTNERSHIP

In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. Explanation I : The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. Explanation II : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment - (a) by a lender of money to persons engaged or about to engage in any business (b) by a servant or agent as remuneration, (c) by the widow or child of a deceased partner, as annuity, or (d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.

TYPES OF PARTNERSHIP:

PARTNERSHIP-AT-WILL - Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is "partnership-at-will". Section8 PARTICULAR PARTNERSHIP - A person may become a partner with another person in particular adventures or undertakings.

ii) Advantages and Disadvantages of Partnership:

The partnership has several advantages over the sole proprietorship. First, it brings together a diverse group of talented individuals who share responsibility for running the business. Second, it makes financing easier: The business can draw on the financial resources of a number of individuals. The partners not only contribute funds to the business but can also use personal resources to secure bank loans. Finally, continuity needn’t be an issue because partners can agree legally to allow the partnership to survive if one or more partners die.

Still, there are some negatives. First, as discussed earlier, partners are subject to unlimited liability. Second, being a partner means that you have to share decision making, and many people aren’t comfortable with that situation. Not surprisingly, partners often have differences of opinion on how to run a business, and disagreements can escalate to the point of actual conflict; in fact, they can even jeopardize the continuance of the business. Third, in addition to sharing ideas, partners also share profits. This arrangement can work as long as all partners feel that they’re being rewarded according to their efforts and accomplishments, but that isn’t always the case.

iii)

As already discussed, in a partnership business, partners have joint unlimited liability; that means, the partners are liable for all the debts made by them and by the company, The liability is unlimited in case of a partnership which means, at the time of settlement of the dues by the firm, if firms assets are not sufficient to repay the debts, the partners personal property is also held liable.

In the given scenario, the partnership firm already has a large debts that remains unpaid. If David and Mary take over the practise, they become legally bound to settle all the dues on behalf of the company. If the firms assets are not sufficient enough to settle those dues, David and Mary will have to introduce fresh investments to settle them out of their personal assets. Hence, its better for them to write an agreement with the retiring doctors that the said unpaid debts are to be repaid by the retiring doctors and only after doing so, the medical practise shall be taken over. They can also deal it in a different way that, from the net consideration payable for taking over the partnership, they can deduct an amount equivalent to the existing debts and the net amount shall be paid to them.