Partnership law notes in Tanzania (+pdf download)

Here you will find comprehensive and easy-to-understand notes about Partnership law in Tanzania.

Throughout these partnership law notes, I will explore

  • Law govern Partnership in Tanzania
  • Meaning of Partnership
  • Formation of Partnership in Tanzania
  • Advantages and Disadvantages of Partnership
  • Types of Partners
  • Duties and Rights of Partners
  • Partnership Property
  • Expulsion of Partners
  • Dissolution of Partnership
  • Effects of the Dissolution of Partnership
  • etc.

Let’s get started

Law Governing Partnership in Tanzania

The primary law that governs partnership in Tanzania is Part X of the Law of Contract Act (LCA), Cap 345.

Among other things, this law provides for the meaning of partnership, the formation of partnership, duties, and rights of partners, partnership property, dissolution of the partnership, etc.

Meaning of Partnership

A partnership is defined under section 190 (1) of LCA to mean “the relation which subsists between persons carrying on business in common with a view of profit”.

In the case of FRANSISCA N. MUKAJUNA vs FRANCIS M. MAKASSY CIVIL CASE NO 15 OF 2017, HC DSM, Judge MRUMA, J defines Partnership as an agreement between two or more persons who combine their resources to form a business and agree to share risks, profits, and losses.

Imagine two friends, Alex and Taylor, who share a passion for creating handcrafted furniture. Instead of pursuing individual ventures, they decided to form a partnership named “Artisan Creations.” In this partnership, both Alex and Taylor contribute their skills, expertise, and resources to create and sell unique, handcrafted furniture pieces.

Persons who have entered into a partnership with one another are called collectively as “firm” and the name under which their business is carried on is called the ‘firm’ name. [S 190 (2)].

When it comes to partnerships, the law acknowledges the connection between the people involved (the partners) but doesn’t see the partnership itself as a separate entity.

In other words, the partnership is not treated like its own independent thing apart from the individual partners.

So, when the partnership does something, like making a decision or entering into a contract, the law considers it as if each partner is personally doing that action.

The partnership doesn’t have its own existence in the eyes of the law – it’s just a group of people working together, and whatever the partnership does is really just the individual partners doing things in their personal roles.

Formation of Partnership

The relationship of partnership arises from contract and not from status S 191.-(1).

That means when people decide to work together as partners in a business, it’s not because of their formal position or title (status), but because they have agreed to do so by making a specific agreement or contract.

Imagine you and a friend want to start a lemonade stand together. You don’t become partners just because you’re friends; instead, you become partners by talking about it and deciding to work together.

You might agree on things like how much money each of you will invest, how you’ll share the work, and how you’ll split the money you make.

This agreement is like a contract, and it’s what creates the partnership, not any official title or status.

So, the idea is that partnerships are formed by people willingly agreeing to work together, not because of any special status or role they have. It’s a result of a mutual understanding and agreement between individuals.

Therefore for a partnership to be formed the following elements must be present

  1. Contract
  2. Business
  3. Partners
  4. Intentio to make a profit

NB; The existence of a partnership like any other contract may be expressed or implied from the conduct of the parties, and not necessarily the existence of a partnership deed. See FRANSISCA N. MUKAJUNA vs FRANCIS M. MAKASSY CIVIL CASE NO 15 OF 2017, HC DSM

Partnership Agreement

A partnership Agreement also known as a Partnership Deed is a primary document in the formation of a partnership.

I have a full guide that teaches everything you need to know about Partnership Agreements. read it here

Once a partnership deed is ready, the following is what next;

Registration of partnership

The partners must register the firm with BRELA and obtain a registration certificate, which displays the partners’ names and their respective distribution ratios.

to successfully register a firm, you must do the following;

  • Go to https://ors.brela.go.tz/
  • fill in all required info and attachments
  • Pay Requisite Fees

TIN application

In applying for TIN the partnership firm shall apply for its certificate by submitting a copy of the certificate of registration obtained from BRELA, partnership deed, lease agreement/title deed of the office building, and introduction letter from the local authority.

Each individual partner shall apply for TIN, in case any partner has already issued with TIN certificate for other purpose he/she cannot make another application. The same TIN will be used.

Obtaining business licence

Before starting a business a partnership must obtain a valid business license from a local authority within which the business will be carried out.

Businesses operating in a specific area must comply with the specific requirements set by local authorities.

Ensure that you acquire the essential licenses or permits to conduct your operations in a lawful manner.

Advantages Partnership

Partnerships offer several advantages that make them an appealing business structure for certain individuals and entities. Here are some key advantages of partnerships:

  1. Ease of Formation:
    • Partnerships are relatively easy to establish, requiring minimal formalities. Typically, partners can start a business with a simple agreement, and the process is less complex compared to incorporating a company.
  2. Shared Financial Responsibility:
    • Partnerships allow for shared financial responsibility. Partners contribute capital, share expenses, and jointly invest in the business, reducing the burden on individual partners.
  3. Diverse Skills and Resources:
    • Partnerships often involve individuals with diverse skills, expertise, and resources. This diversity can enhance the overall capabilities of the business, leading to a more well-rounded and adaptable operation.
  4. Flexibility in Decision-Making:
    • Decision-making in partnerships is often more flexible and collaborative. Partners can discuss and decide on business matters collectively, fostering a sense of joint ownership and involvement in key choices.
  5. Tax Advantages:
    • Partnerships typically do not face income taxation at the business level. Instead, profits and losses flow through to the individual partners, who report them on their personal tax returns. This can lead to potentially favorable tax treatment compared to other business structures.
  6. Ease of Management:
    • Partnerships often involve a smaller number of partners compared to corporations, making management and communication more streamlined. This can lead to quicker and more efficient decision-making processes.
  7. Profit Sharing:
    • Profits generated by the business are distributed among the partners according to the agreed-upon profit-sharing ratio. This can provide a fair and transparent method of rewarding each partner’s contribution.
  8. Mutual Support and Collaboration:
    • Partnerships thrive on mutual support and collaboration. Partners can share ideas, resources, and responsibilities, creating a supportive environment that fosters business growth.
  9. Lower Regulatory Compliance:
    • Partnerships face fewer regulatory and compliance requirements compared to corporations. This can result in lower administrative burdens and associated costs.
  10. Personal Connection and Trust:
    • The personal relationships between partners often contribute to a high level of trust and commitment. This can lead to a more resilient and cohesive business, with partners invested in each other’s success.
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Disadvantages of Partnership

While partnerships have various advantages, they also come with certain disadvantages. Here are some common drawbacks associated with partnerships:

  1. Unlimited Liability:
    • In a general partnership, each partner is personally responsible for the business debts and liabilities. This means that if the business faces financial difficulties or legal issues, the personal assets of the partners can be used to settle the debts, potentially risking personal wealth.
  1. Shared Profits:
    • Profits must be shared among partners according to the agreed-upon terms, which may result in each partner receiving a smaller share compared to running an individual business.
  1. Disagreements and Conflict:
    • Partnerships involve shared decision-making, and differences in opinions or conflicts among partners may arise. Resolving disputes can be challenging and may impact the overall functioning of the business.
  1. Limited Capital and Resources:
    • Partnerships may face limitations in terms of available capital and resources, especially when compared to larger business structures. Raising funds or attracting investors can be more challenging.
  1. Dependency on Partners:
    • The success of the business depends on the efforts, skills, and commitment of each partner. If one partner is not pulling their weight or decides to leave, it can negatively impact the business.
  1. Shared Management Control:
    • Decision-making is shared among partners, which can lead to slower responses to changes in the business environment. Unanimous agreement may be required for certain significant decisions.
  1. Limited Life of the Partnership:
    • Partnerships are often tied to the life of the partners or a specific agreement. If a partner decides to leave or if there are changes in the partnership structure, it may lead to the dissolution of the partnership.
  1. Difficulty in Transferring Ownership:
    • It can be challenging to transfer ownership or sell a partnership interest. This lack of liquidity can restrict the ability of partners to exit the business or bring in new partners.
  1. Shared Accountability:
    • Partners are collectively responsible for the actions of each partner, which means that one partner’s mistakes or misconduct can affect the entire business and all its partners.
  1. Tax Implications:
    • Partnerships are subject to pass-through taxation, meaning profits and losses are passed through to individual partners. While this can be advantageous in some situations, it can also result in tax complexities for the partners.

Types of Partners

Partnerships can take various forms, and the types of partners within a partnership structure may vary based on their roles, responsibilities, and contributions to the business.

Here are common types of partners:

General Partners

General partners are actively involved in the day-to-day operations of the business. They typically contribute capital, share in the management responsibilities, and have unlimited personal liability for the partnership’s debts.

Limited Partners

Limited partners, on the other hand, are passive investors who contribute capital to the business but do not participate in its daily operations. Their liability is limited to the amount of their investment, providing a level of protection compared to general partners.

Equity Partners

Equity partners are individuals who invest capital into the business and, in return, receive a share of the ownership (equity) in the partnership. They may include both general and limited partners.

Salaried Partners

Some partnerships may have salaried partners who receive a fixed salary for their contributions to the business. They may or may not have an ownership stake in the partnership.

Silent Partners

Silent partners are similar to limited partners in that they don’t actively participate in the day-to-day operations of the business. However, they may have an ownership stake and receive a share of the profits.

Managing Partners

In partnerships, a managing partner is responsible for overseeing the daily operations and decision-making processes. They may have additional responsibilities compared to other partners.

Nominal Partners

Nominal partners are those whose names are included in the partnership agreement for various reasons, such as lending credibility to the business or for legal requirements. However, they may not have a significant role in the operations or financial contributions.

Senior Partners

Senior partners are individuals who have been with the partnership for an extended period and may hold leadership positions. They often have more experience and may play a key role in decision-making.

Junior Partners

Junior partners are newer members who have recently joined the partnership. They may have a smaller ownership stake and fewer decision-making responsibilities compared to senior partners.

Social Partners

In professional service partnerships like law firms or accounting firms, social partners may be admitted based on their social compatibility and ability to contribute to the overall cohesion of the partnership.

Duties and Rights of Partners

Duties of partnership are divided into two categories, i.e Duties and Rights between partners themselves/intersee and Duties and Rights  between partners and third party

Duties and Rights between partners themselves/Intersee

  1. A partner has to take care of the property, rights, goodwill, and interest in property acquired by a partnership. [s. 195 (1)].
  2. To carry on the business of partnership for the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives [s.192 Cap 345]
  3. Fiduciary duty as expounded under section 196 of Cap 345
  4. [s.194] in absence of contrary agreement the following rights and obligations prevail
    take part in the management of the partnership business
  5. Any differences in ordinary matters are decided by a majority of all partners. But no change in the nature of the business of the firm without the consent of all partners
  6. every partner has a right to have access to and to inspect and copy any of the firm’s books.
  7. all partners are entitled to share equally in the capital and profits of the firm’s business and must contribute equally towards its losses
  8. be indemnified by the firm on payment made and personal liability incurred when working for the firm.
  9. Indemnify the firm for any loss he has caused.
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Duties and Rights between Partners and Third Parties

Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner did act for carrying on business in the usual way of the kind carried on by the firm bind the firm and his partners. [s. 201(1) SEE s. 201 (2) the acts where a partner will not be regarded as an agent unless there is express authority customs or usage.

Has a duty to act with due diligence and skill when dealing with third parties.

S. 204 –Every partner is liable to compensate third persons in respect of loss arising out of penalty incurred by wrongful act or omission of any partner acting in the ordinary course of business of the firm or with the authority of the other partners. MELITA MEYASI V NBC 1977 LRT NO. 42

S. 202 any act executed in the firm name in a manner showing intention to bind a firm is actually binding on the firm and all partners.

Partnership Property

All property and rights and interests in a property originally brought into the partnership stock or acquired by purchase or otherwise, on account of the firm, or for the purpose and in the course of the partnership business, including the goodwill of the business, are a partnership property and must be held by the partners for the purposes of the partnership and in accordance with the partnership agreement, or failing such agreement the provisions of section 195 (1) of the Law of Contract Act

Properties that may be employed in partnership business belong to the following categories;

  • Property that belongs to the partners as a firm – this is partnership property
  • Property that belongs to the partners as co-owners but is not partnership property
  • Property that belongs to individual partners

It is therefore important to determine which category of the property employed by the partnership belongs.

In MILES V CLARKE (1953) 1 ALL E.R 779 C carried on business as a photographer at premises of which he owned the lease for seven years from 1948.

In 1950, he and M who was a freelance photographer entered into a partnership in which all the profits were shared equally. M brought with him his personal connection. The partners quarreled, and a dispute arose as to whether the following items constituted partnership property:-

  • the consumable stock-in-trade
  • The personal connection brought by each partner
  • The lease of the premises
  • The furniture, fittings, and equipment of the studio

It was held that no more agreement between the parties should be supposed then was absolutely necessary to give business efficacy to the relationship between the parties.

Accordingly, since the only agreement was to the share of profits, only the consumable stock-in-trade should be regarded as partnership property.

Unless the contrary intentions appear, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired on account of the firm section 195 (2) of Cap 345, however, such a purchase is not conclusive evidence because a contrary intention may be revealed by surrounding circumstances.

For example, if the property is bought out of the firm’s money and conveyed to one partner to whom the price is debited as a loan from the firm.

There is evidence that the property is not bought on the account of the firm. It is therefore not partnership property.

Where land or any heritable interest therein has become partnership property, it shall, unless the contrary intention appears, be treated as between the partners (including the representative of the deceased partner), and also as between the heirs of the deceased partner and his executors or administrators, as personal or moveable and no real or heritable estate Section 195 (3) of Cap 345.

Expulsion of Partners

The law is to the effect that the partner will be expelled by other partners from the firm if the power to that effect has been conferred by agreement. s. 199 LCA.

If the expulsion is challenged in court the judge must see that the majority expulsion clause has not been abused.

It must be shown the complaint that is said to allow expulsion is covered by the expulsion clause;

For example, in SNOW v. MILFORD, the court decided that “adultery of a banker all over Exeter” was not a ground for his expulsion because it was not within the wording of the expulsion clause. This dealt only with financial frauds which would discredit the banking business.

That the partner expelled was told what he had done wrong and given a chance to explain. In BARNER v. YOUNG a partner who was living with a woman to whom he was not married continued to do so after becoming a partner.

There was nothing to show that this was damaging to the firm business. Even so, he was expelled by his fellow partners who refused to tell him why they were doing so. The court held that his expulsion was unlawful and ineffective.

That those who exercised the powers of expulsion did so in all good faith.

For example, in BLISET v. DANIEL (1853) a partner was expelled but he had done nothing to hurt a firm, but the partnership agreement said that a majority of partners could buy out another. The motive of the other partners was just to get a bigger share of property and profits.

The court held the expulsion not effective as was done in bad faith.

Dissolution of Partnership

There are two ways through which an existing partnership may come to an end that is Extra-Judicial Dissolution of Partnership and Judicial Dissolution of Partnership.

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Extra-Judicial Dissolution of Partnership.

Extra-judicial dissolution of Partnership takes place in the following situations;

  1. If entered for a fixed time, by the expiration of that time [s.212(1)(a)]
  2. If entered for a single venture or undertaking, by the termination of that venture or undertaking [s.212 (1)(b)] see FLORENT RUGARABAMU V. HASSAN MAIGE GORONGA [1988] TLR 243.
  3. If entered into for an undefined time, by the partner giving notice to the other or others of his intention to dissolve the partnership [s.212(c)]
  4. On the death or the bankruptcy of any partner [s.213].
  5. On the happening of any event which renders the business illegal [s.214].

Judicial Dissolution of Partnership

Judicial Dissolution of a Partnership occurs when partners apply for an order in the court of law under the following grounds:

When a partner becomes of unsound mind.

A partner becomes incapable of performing his part of partnership contacts. The situation must be permanent.
In WHITEWELL v. ARTHUR (1865) a partner was paralyzed for some months; he had recovered when the court heard the petition and it could not grant a dissolution.

Partnership agreement often contains express clauses that allow dissolution after a stated period of incapacity. In PEYTON v. MINDHAM (1972) the time for incapacity allowed by the clause was nine months.

When a partner has been guilty of misconduct, which goes to the root of the business.

This can be illustrated by the case of ESSEL V HAYWARD (1860) where a solicitor partner misappropriated 8000 pounds of trust money in the course of his duties as a partner.

This was a ground for dissolving a partnership for a fixed term. It may be outside conduct like a criminal act that ultimately makes the partner be convicted of fraud or misconduct.

When a partner wilfully and persistently commits a breach of the partnership agreement or conducts himself in such a manner that it becomes difficult for others to carry the business with him.

When the business of the partnership can only be carried out at a loss. If this is temporary the court will not grant dissolution as was in the case of HANDYSIDE v. CAMPBELL (1901) a sound business was losing money because the senior managing partner was ill. He asked the court for dissolution; the court did not grant it as the other partners would manage it.

Effects of the Dissolution of Partnership

After the dissolution of the partnership the authority of each partner to bind the firm and the other rights and obligations of the partners continue so far as may be necessary to wind up the affairs of the firm and complete transactions initiated before dissolution.

In simpler terms, even after the partnership is dissolved, the partners are allowed to wrap up any remaining business matters or deals that were in progress before the partnership officially came to an end. This ensures that everything is properly finished and settled before the partners go their separate ways.

The case of GULAMALI WALJI HIRJI v. MRS SHABAN WALJI AND ORS (1972) HCD 230; the case reiterates section 218 of the LCA that on the dissolution of the partnership relationship to complete winding up, and complete transaction began before the dissolution; also the time to have a full account of a partnership in accordance with section 192 of the LCA

The right of the partners with regard to the property where the partnership is dissolved

  1. Losses must be paid out of profit, then out of capital, and finally if necessary, by the partners themselves in the proportion in which they agree to share the profit
  2. The assets of the firm must be applied in the following order;
    1. The debts and liabilities of the firm to nonpartners
    2. Paying to each partner rateably what is due from the firm to him for advances as distinct from capital
    3. Paying each partner rateably what is due from the firm to him in respect of capital.
  3.  In event of there being a residue, it is divided into the partners in the proportion in which profits are divided.
  4. Similarly, if the assets are not sufficient to repay the partners’ capital in full, the deficiency must be borne by the partners in the same proportion as the profits would be divided [GARNER V MURRAY (1904) 1 Ch. 57]

Payment of the firm debts

Where there are joint debts due to the firm and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of debts of the firm, and if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him.

The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm. Section 225 of Cap 225

Goodwill in a dissolution of a partnership

The assets include not only the stock–in–trade and book debts, furniture, tools, machinery, etc, but also intangible, but often very valuable, property, called goodwill. It is saleable property.

Goodwill is public approbation that has been won by the business, and that, is considered a marketable thing; it is the probability of the customers or clientele of the firm resorting to the person(s) who succeed in the business as a going concern.

The value of the goodwill of a dissolved partnership as a saleable commodity is considerably decreased by the rule laid down in the case of TREGO v. HUNT (1896) AC 7 namely, that the sale of it does not prevent the vendor from carrying on the competing business with the purchaser, but quondam partners may be restrained by injunction from soliciting any person who was the customer of the old firm.

The vendor may be prohibited from carrying on business under the name of the old firm or from representing themselves as the continuing old firm, (Underhill, Principles of Law of Partnership, Butterworth (1966) p 121-123)

Partnership law notes in Tanzania pdf

Conclusion

Throughout these Partnership law notes in Tanzania, I’ve navigated the foundational aspects of partnerships, from their formation to dissolution, and explored the rights and obligations of partners along the way.

Should you have any questions, thoughts, or any additional insights, I encourage you to leave a comment right now!

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