13: Sole traders and partnerships Flashcards
is there a requirement for a sole trader to file accounts?
no, there is an obligation for a ST to keep accounts but no requirement to file them
does the business of a sole trader have a separate legal identity from that of the individual?
no
what is strictly necessary to set themselves up as a sole trader?
inform hmrc that they are self-employed
do you need to register for VAT when setting up to be a sole trader? (explain whether it is yes or no)
only if you exceed the VAT registration threshold within the following 30 days from commencement
does a sole trader have unlimited or limited liability on behalf of the business?
unlimited
what is the principal disadvantage of being a sole trader?
unlimited liability, so personal assets such as houses are also liable in the case of recovery of debts
is a person and their business in a sole trader sometimes treated as separate? and in what circumstances?
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
can losses from the trade be offset against employment income?
if so, what are the conditions to this
yes,
but it is only for the first 4 years of trade that can be carried back 3 years
what NICs will a self employed person not have to pay on their own behalf?
Class 1 NICs
is a partnership considered a separate legal entity?
no
A business commences when the taxpayer begins operational activities. what are operational activities?
dealing with third parties immediately and directly related to the suplies to be made.
the acquisition of goods and sale of stock
has operational activity taken place when the person is negotiating contracts?
no, not until there are obligations in place
what does it mean in a partnership for the business to be carried on IN COMMON?
to all act as one and in common, so every partner has a say in the management of the partnership
what is a sleeping partner?
a partner that is not involved in the day to day operations of the business or management, but is a partner of the firm
can a non for profit organisation be run as a partnership and explain your answer
no, because a partnership must have a shared view to a profit
intention to make profit (even if it is not realised)
can a partnership be classed as a partnership without a written partnership agreement, or name creation?
yes
‘persons who intend to form a company and work together toward that end’ - is this a definition of partners?
no - this is not classed as a partnership
is a written partnership agreement legally required
no, not legally required
what are the 3 advantages to having a written partnership agreement?
- 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
ideally, the partnership agreement should cover the following matters: (11)
- 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
what 3 types of authorities do partners have when making contracts on behalf of the firm?
Express authority
Implied authority
Apparant authority
unless the partnership agreement says otherwise, the PA 1890 states when a partner makes a contract: (3)
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
are partners liable to the personal debts of a partner too?
no, just the debts of the business
if a new partner joins the firm, are the liable to the debts of the business?
no, they are only liable to the debts of the business after they start. UNLESS otherwise agreed in the partnership agreement
are retired partners liable to the debts of the firm?
yes, they are liable to debts outstanding whilst they were partner, unless the creditor has released them from liability
in what case may a retired partner be liable for debts incurred after their retirement?
if the creditor has not been given notice that the partner has retired
partnership property is only classified as partnership property if: (2)
- it was brought in by partners who formed the partnership
- it was bought with partnership money
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?
no
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?
yes it can be used
they will seek partnership property first, before recourse is had to the private property of the partners
what are the three duties between partners, according to the partnership act?
- 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
what is the order in which partnership property is distributed upon dissolution? (4)
- repaying external debts
- repaying partners advances (loans)
- repaying partners capital contributions
- anything left over is repaid to partners in the profit sharing ratio
in limited partnerships, what is the role of the “general partner”
a general partner is one that holds full, unlimited liability
does an LLP have a separate legal identity
yes
do members of an LLP have an unlimited or limited liability?
limited
Even though an LLP is a corporate body, it may be treated as _____ for tax purposes
transparent
Why is an LLP considered more flexible than a company?
a company has separation between its owners and directors.
whereas the partners of an LLP own and run the business
what is the key statue for LLPs
limited liability partnerships act 2000
will partners of an LLP be taxed on income tax on their share of trading profits?
yes
what 2 NICs will partners of an LLP pay
class 2 and 4
what are the two situations where the LLP is not bound when a contract is made by a partner (member)?
- if the partner has no authority to do so
- if the third party is aware they do not have authority
what is the term used to describe that the LLP does not end on a partner leaving it and continues in existence?
perpetual succession
if it is a 2 partner LLP and one dies, how long will the LLP exist for before being wound up by the court?
6 months
when an LLP is put into insolvency, is it still considered transparent?
no
