Liability of Salaried Partners in Partnerships

It is by no means uncommon for partnerships to be composed of two sorts of partners – the ‘equity partners’, who share the profits after all expenses are met, and the ‘salaried partners’, who normally receive a fixed share of profits (sometimes with performance bonuses) by way of salary. A salaried partner’s status is therefore somewhat more akin to that of an employee than an equity partner.

Since the Partnership Act 1890 stresses that a partnership is an undertaking carried on with a view to profit, salaried partners are not normally regarded as ‘true’ partners for some purposes.

A recent case involved a solicitor, who took on a retired solicitor as a salaried partner. As a condition of joining the firm on a salaried partner basis, the salaried partner required the firm to obtain a letter from its bank stating that he was not liable for the firm’s debts to the bank. He also obtained a verbal assurance from the owner of the firm that he would have no liability for any debts of the firm which arose prior to or after he became a partner. He worked only part-time for the firm, although his name appeared on the letterhead. He left the firm after a relatively short period. However, for the nine months prior to his second retirement, the firm had contracted to another firm for the provision of services. That firm sued for payment of outstanding invoices and included the salaried partner in the claim.

The salaried partner contested the claim on the basis that he was not a partner because he did not share in the profits of the business. The Court, and subsequently the Court of Appeal, rejected this argument. In the view of the judges, the fact that there was a business and that it was carried on with a view to making a profit was enough to make him a partner.

Salaried partners may think that they are excluded from liability if things go wrong, and this is not normally the case. Seeking guarantees from the equity partners is a possible safeguard, but these are only as good as the financial standing of the equity partners who give them. If you are offered a partnership in any business, measures may be taken to reduce the risks.