Partnership
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Legal Entities of the World™
A spotter’s guide to corporate wildlife
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A bunch of people getting together to pursue a common business endeavour under which they will pool resources and share profits from the undertaking without creating a separate legal entity.
Netting
One of ISDA’s vaunted netting categories.
Partnership: A legal entity or form of arrangement without legal personality that is (a) organised as a general, limited or some other form of partnership and (b) does not fall within one of the other categories in this Appendix B. If it does not have legal personality, it may nonetheless be treated as though it were a legal person for certain purposes (for example, for insolvency purposes) and not for other purposes (for example, tax or personal liability).
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The thing about netting against a partnership is that the partnership isn’t a legal thing as such — it can’t go bankrupt — so the real question is could you enforce netting against one of the individual partners, to whom you impute joint and several liability.
It gets weirder than that: for since any of the other partners could theoretically defend the action or take action against your purported close out, do you have some risk that if any of the partners is non-nettable, then the whole contract with the partnership is non-nettable?
Generally
In the good old days, partnerships were a discrete form of business organisation which had a number of unusual features:
- No legal personality: Unlike a corporation, a partnership has no separate legal entity distinct from the collected personality of the individual partners, so to enter a contract with a partnership, or to sue one, is to sue its collected partners. If this were a corporation, that would be the equivalent of suing each of the shareholders of the corporation. This creatres conceptual difficulties and issues of course: partnership shares are not equal, and having to sue three hundred people at the same time just to recover a £5,000 debt, and working out exactly who owes what of that sum, seems rather a faff, so the comnmon law imputed to a partnership
- Joint and several liability: This means every partner in a partnership is personally liable for the whole of the partnership’s debt and other liabilities. This is really a pragmatic solution that the common law evolved, to recognise that untangling the complicated web or inter-partner responsibilities for action taken in the partnership’s name should not be a creditor’s problem: that burden should rest with the partners to sort out among themselves. So, a partner so sued for the partnership’s liability may seek proportional recovery from her partners — assuming they are solvent — but none of this is the creditor’s problem.
- No real formal criteria for a partnership to exist: Whether one is in a partnership or not is not always clear: whereas a corporation must have memorandum and articles of association and be registered with Companies registry somewhere, a partnership can be deemed to exist by behaviour, needs to formal deed or document, let alone any regulatory registration. Partnerships are defined by their general characteristics: profit sharing, common ownership of property and contribution of capital, joint management of the enterprise — which are unusual things for merchants to do if they don’t intend to be partners, but all the same, given the potential gravity of joint and several liability, the risk of inadvertent partnership creates a spectral fear in legal advisors which you will often see articulated through the boilerplate provision of a no partnership covenant.
These days many forms of organisation which were partnerships — or were required to be — are not, and partners have rapidly incorporated themselves into actual limited liability companies, or at least converted into limited liability partnerships, which look a lot more like corporate forms.