13: Sole traders and partnerships

Question 1

is there a requirement for a sole trader to file accounts?

Answer 1

no, there is an obligation for a ST to keep accounts but no requirement to file them

Question 2

does the business of a sole trader have a separate legal identity from that of the individual?

Answer 2

no

Question 3

what is strictly necessary to set themselves up as a sole trader?

Answer 3

inform hmrc that they are self-employed

Question 4

do you need to register for VAT when setting up to be a sole trader? (explain whether it is yes or no)

Answer 4

only if you exceed the VAT registration threshold within the following 30 days from commencement

Question 5

does a sole trader have unlimited or limited liability on behalf of the business?

Answer 5

unlimited

Question 6

what is the principal disadvantage of being a sole trader?

Answer 6

unlimited liability, so personal assets such as houses are also liable in the case of recovery of debts

Question 7

is a person and their business in a sole trader sometimes treated as separate? and in what circumstances?

Answer 7

yes for tax purposes.

for example, if the sole trades takes some trading stock for private use, it will be treated as if it was sold at market value

Question 8

can losses from the trade be offset against employment income?

if so, what are the conditions to this

Answer 8

yes,

but it is only for the first 4 years of trade that can be carried back 3 years

Question 9

what NICs will a self employed person not have to pay on their own behalf?

Answer 9

Class 1 NICs

Question 10

is a partnership considered a separate legal entity?

Answer 10

no

Question 11

A business commences when the taxpayer begins operational activities. what are operational activities?

Answer 11

dealing with third parties immediately and directly related to the suplies to be made.

the acquisition of goods and sale of stock

Question 12

has operational activity taken place when the person is negotiating contracts?

Answer 12

no, not until there are obligations in place

Question 13

what does it mean in a partnership for the business to be carried on IN COMMON?

Answer 13

to all act as one and in common, so every partner has a say in the management of the partnership

Question 14

what is a sleeping partner?

Answer 14

a partner that is not involved in the day to day operations of the business or management, but is a partner of the firm

Question 15

can a non for profit organisation be run as a partnership and explain your answer

Answer 15

no, because a partnership must have a shared view to a profit

intention to make profit (even if it is not realised)

Question 16

can a partnership be classed as a partnership without a written partnership agreement, or name creation?

Answer 16

yes

Question 17

‘persons who intend to form a company and work together toward that end’ - is this a definition of partners?

Answer 17

no - this is not classed as a partnership

Question 18

is a written partnership agreement legally required

Answer 18

no, not legally required

Question 19

what are the 3 advantages to having a written partnership agreement?

Answer 19

• covers more details than the PA 1890 does
• allows different terms to be said (e.g. different share of profits, otherwise the PA states all profits are shared equally). these terms will override the PA
• bespoke clauses can be included

Question 20

ideally, the partnership agreement should cover the following matters: (11)

Answer 20

• name, place of business, nature of business
• commencement and duration
• capital invested and interest on capital share
• share of profits amongst partners
• meetings and management of partners
• restrictive things against partners
• admission of new partners and retired partners
• dead or retired partners effect
• indemnity of partners
• financial statements
• dispute resolution

Question 21

what 3 types of authorities do partners have when making contracts on behalf of the firm?

Answer 21

Express authority
Implied authority
Apparant authority

Question 22

unless the partnership agreement says otherwise, the PA 1890 states when a partner makes a contract: (3)

Answer 22

Every partner is an agent of the business

When signing the contract, this means all other partners are bound by the contract

If the particular partner had been explicitly told they cannot make contracts on behalf of the firm, the contract will still be binding if the third party did not know this

Question 23

are partners liable to the personal debts of a partner too?

Answer 23

no, just the debts of the business

Question 24

if a new partner joins the firm, are the liable to the debts of the business?

Answer 24

no, they are only liable to the debts of the business after they start. UNLESS otherwise agreed in the partnership agreement

Question 25

are retired partners liable to the debts of the firm?

Answer 25

yes, they are liable to debts outstanding whilst they were partner, unless the creditor has released them from liability

Question 26

in what case may a retired partner be liable for debts incurred after their retirement?

Answer 26

if the creditor has not been given notice that the partner has retired

Question 27

partnership property is only classified as partnership property if: (2)

Answer 27

• it was brought in by partners who formed the partnership

- it was bought with partnership money

Question 28

if a partner has personal debt, not related to the business, can the creditor recover debts by taking the partnership property to satisfy the debt?

Answer 28

no

Question 29

on dissolution of the partnership, can partnership property be used to satisfy the debt?

and what will they use to recover the debt first - partnership property, or personal property?

Answer 29

yes it can be used

they will seek partnership property first, before recourse is had to the private property of the partners

Question 30

what are the three duties between partners, according to the partnership act?

Answer 30

• a partner must render true accounts and full information
• a partner must account for profit made in the course of business using the firm’s name, property
• a partner must account for profit made in a business of the same kind, as or competing with, the firm

Question 31

what is the order in which partnership property is distributed upon dissolution? (4)

Answer 31

1. repaying external debts
2. repaying partners advances (loans)
3. repaying partners capital contributions
4. anything left over is repaid to partners in the profit sharing ratio

Question 32

in limited partnerships, what is the role of the “general partner”

Answer 32

a general partner is one that holds full, unlimited liability

Question 33

does an LLP have a separate legal identity

Answer 33

yes

Question 34

do members of an LLP have an unlimited or limited liability?

Answer 34

limited

Question 35

Even though an LLP is a corporate body, it may be treated as _____ for tax purposes

Answer 35

transparent

Question 36

Why is an LLP considered more flexible than a company?

Answer 36

a company has separation between its owners and directors.

whereas the partners of an LLP own and run the business

Question 37

what is the key statue for LLPs

Answer 37

limited liability partnerships act 2000

Question 38

will partners of an LLP be taxed on income tax on their share of trading profits?

Answer 38

yes

Question 39

what 2 NICs will partners of an LLP pay

Answer 39

class 2 and 4

Question 40

what are the two situations where the LLP is not bound when a contract is made by a partner (member)?

Answer 40

• if the partner has no authority to do so

- if the third party is aware they do not have authority

Question 41

what is the term used to describe that the LLP does not end on a partner leaving it and continues in existence?

Answer 41

perpetual succession

Question 42

if it is a 2 partner LLP and one dies, how long will the LLP exist for before being wound up by the court?

Answer 42

6 months

Question 43

when an LLP is put into insolvency, is it still considered transparent?

Answer 43

no