2. Partnerships and LLPs

Question 1

Define what a partnership is as per the Partnership Act (PA) 1890.

Answer 1

A relationship between persons carrying on a business in common with a view to making a profit (s1(1) PA 1890).

Question 2

How many persons must there be to form a partnership?

Answer 2

At least two persons

Question 3

Outline the list of rules for determining the existence of a partnership as per Section 2 PA 1890.

Answer 3

-Evidence of profit sharing will be prima facie evidence but not necessarily conclusive (s2(3) PA 1890)
-If all individuals take part in decision making, it is more likely a partnership exists
-A loan of money by one party to another does not create a partnership

Question 4

What are the advantages of a partnership?

Answer 4

-Costs nothing to create
-No formality is required
-No filing or disclosure requirements
-There is an overriding duty of good faith in a partnership

Question 5

What is the contractual personal liability of partners for partnership debts?

Answer 5

Every partner in a firm is liable jointly with the other partners for all the debts and obligations the firm incurred whilst they are a partner (ss9 PA 1890)

Question 6

What is the tortious personal liability of partners for partnership debts?

Answer 6

The partners’ liability is joint and several (ss10 & 12 PA 1890)

Question 7

If a creditor obtains a judgment against one, or a number of partners, does this discharge the other partners?

Answer 7

No, as per S3 Civil Liability Contribution Act 1978

Question 8

What is the liability of new partners in relation to any debts incurred before they joined?

Answer 8

They will not automatically be liable as per s17(1) PA 1890

Question 9

What is the liability of retired partners in respect of debts incurred whilst they were a partner?

Answer 9

They will still be liable under s17(2) PA 1890. In order to relieve a partner from an existing liability once they retire, the relevant agreement must be novated with the consent of the creditor (s17(3) PA 1890).

Question 10

Is it possible for a former partner to become liable for partnership debts incurred after they have left?

Answer 10

Yes, a third party can treat all apparent partners of the firm as jointly liable to pay any new debt unless that third party has been notified of this change either by:
-actual notice (s36(1) PA 1890), for those who have had actual dealings with the partner before departure
-constructive notice, by virtue of publication of the departure in the London Gazette (s36(2) PA 1890)

Question 11

Will a former partner be liable for debts to any third party who did not know them to be a partner before they left?

Answer 11

No, no notice at all needs to be given to such persons.

Question 12

What are the circumstances where a non-partner may be personally liable on a partnership debt if they have held themselves out to be a partner?

Answer 12

S14 PA 1890 states the elements required for this to have effect are:
-a representation to a third party to the effect that a person is a partner
-the third party’s action in response (giving credit to the firm)
-the third party’s state of mind (having faith in the representation)

Question 13

What does S5 PA 1890 introduce in the context of the relationship between the firm and outsiders?

Answer 13

A special statutory rule of agency which applies only when the agent in question is a partner in the firm.

Question 14

Does S5 PA 1890 apply to non-partners?

Answer 14

No, the common law of agency will apply.

Question 15

How do partner’s confirm they are content with an agent’s act to enter into a contract (whether partner or not)?

Answer 15

If all the partners are happy for the firm to enter into the contract and have given actual, express or implied authority to bind the firm, the firm will be bound.

Question 16

Under S5 PA 1890, in what circumstances will a partner’s unauthorized act bind the firm?

Answer 16

If viewed objectively:
-the act is carrying on business of the kind carried on by the firm
-the act is carrying on such a business in the usual way

Question 17

In what circumstances will a partner’s unauthorized act not bind the firm?

Answer 17

If the third party:
-actually knew that the partner in question was not authorized to enter into the contract on behalf of the firm
-did not know or believe that the partner was a partner

Question 18

What is the power of a non-partner to bind the firm against the partners’ wishes in the context of common law agency?

Answer 18

At common law, an agent who has no actual authority may still bind the firm if he has apparent authority to enter into a contract.
This authority arises when the firm represents or permits a representation to be made to a third party that a person has authority to bind the firm eg marketing manager has authority to bind the firm on marketing decisions.

Question 19

Outline the taxation treatment of partnerships.

Answer 19

Each partner is liable to tax as an individual on their share of the income or gains of the partnership. This is known as tax transparency.

Question 20

Can partner’s mutual rights and obligations be varied?

Answer 20

Yes, they can be varied at any time by their unanimous consent (s19 PA 1890)

Question 21

What is the default provision under PA 1890 in relation to commencement and duration?

Answer 21

If the agreement has a fixed term but the partners continue in business after the expiration of that term, they are presumed to be partners on the same terms as before (s27 PA 1890).

Question 22

What must a partnership name not include?

Answer 22

Must not include limited, ltd, LLP, plc or be offensive, be the same as an existing trademark or contain a sensitive word or suggest a government connection.

Question 23

What is the default provision under PA 1890 in relation to partnership property?

Answer 23

-SS20 PA 1890 provides that all property brought into the partnership, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, is partnership property.
-SS21 PA 1890 provides that all property brought with money belonging to the firm/partnership is deemed to have been bought on account of the firm/partnership, unless the contrary intention is shown.

Question 24

What is the default provision under PA 1890 in relation to shares in income and capital and profits/losses?

Answer 24

Partners are entitled to share equally in the capital and profits of the business, and to contribute equally towards the losses of the business (s24(1) PA 1890).

Question 25

Why is a profit sharing ratio (PSR) often required in a partnership agreement?

Answer 25

Because the default provisions of PA 1890 will not accord with the partners’ wishes therefore it is extremely important that there is an express provision in the agreement setting out a profit sharing ratio.

Question 26

What is the default provision under PA 1890 in relation to drawings/salary?

Answer 26

The partnership agreement should set out how much each partner may draw in any given period (may take drawings of income profits). Without an agreement a partner is not entitled to a salary (s24(6) PA 1890)

Question 27

What is the default provision under PA 1890 in relation to work input and roles?

Answer 27

Every partner may take part in the management of the partnership business (s24(5)) but are not required to do so.
The agreement should therefore set out the requirements for each partner in terms of the work they do for the business.

Question 28

What is the default provision under PA 1890 in relation to decision making?

Answer 28

The agreement should deal expressly with decision making and management. All partnership decisions must be decided by a majority, other than the following which require unanimity:
-changes to the nature of the partnership business (s24(8))
-introducing a new partner (s24(7))
-varying the rights and duties of partners (s19)

Question 29

What is the default provision under PA 1890 in relation to incoming partners?

Answer 29

No person may be introduced as a partner without the consent of all existing partners (s24(7)).

Question 30

What is the default provision under PA 1890 in relation to expulsion?

Answer 30

A partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this (s25 PA 1890).

Question 31

If the partnership agreement is silent on retirement/termination, what is the effect of a partner leaving under PA 1890?

Answer 31

The partnership is dissolved via automatic dissolution (s26 PA 1890).

Question 32

What is a non-compete clause in relation to partnership agreements?

Answer 32

Duty not to compete with the firm (s30 PA 1890)

Question 33

What are the three restraint of trade clauses and when will they enforceable?

Answer 33

Non-compete clause
Non-solicit clause
Non-dealing clause
Will only be enforceable if they are reasonable in terms of duration, geography and scope and are necessary for the protection of a legitimate business interest of the partnership

Question 34

What are the ways in which a partnership can be dissolved?

Answer 34

automatic dissolution under:
-expiry of a fixed term (s32(a))
-completion of specific venture (s32(b))
-death or bankruptcy of any partner (s33)
dissolution of partnership by notice from any partner (ss26 and 32(c))
dissolution of partnership if the partnership business becomes unlawful (s34)
dissolution by the court as a last resort (s35)

Question 35

In the event a partnership is wound up, what happens to any money/assets left after all debts/liabilities have been paid?

Answer 35

Subject to any written partnership agreement, where a partnership is wound up, once all debts and liabilities have been paid, any money/assets left will distributed so that each partner is paid back their original capital first (s44(b)(3) PA 1890).

Question 36

What is an asset surplus ration (ASR) and if there is no agreed ASR, how are surplus assets shared?

Answer 36

A provision dealing with the proportion in which any surplus assets are to be shared out following dissolution.
If there is no agreed ASR then s44(b)(4) applies and surplus assets are shared in accordance with the PSR.

Question 37

If there is no ASR or PSR, how are surplus assets shared after dissolution of a partnership?

Answer 37

They are shared equally in accordance with s24(1).

Question 38

What is a limited liability partnership (LLP)?

Answer 38

An LLP is a hybrid vehicle. It has the flexibility of a partnership with the added advantage of limited liability for its members, whilst also having a separate legal personality.

Question 39

What are LLPs commonly used for?

Answer 39

Professional partnerships, such as law firms and accountancy firms. They are also useful for investment structures due to their tax transparency and the benefit of limited liability.

Question 40

Who can form an LLP under the Limited Liability Partnership Act (LLPA) 2000?

Answer 40

Section 2(1)(a) LLPA states that two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP.

Question 41

What are the requirements for registering an LLP at Companies House?

Answer 41

The subscribing members fill out a Form LL IN01, which is sent to Companies House with the relevant fee. The form must state the name of the LLP, its registered office’s address and which members are to be designated members (s2(2) LLPA).

Question 42

What happens once an LLP is registered?

Answer 42

A certificate of incorporation is issued once there is conclusive evidence that all legal requirements have been complied with. LLP is entered on the index of company names and given a number.

Question 43

Once registered, what information are LLPs obliged to continue to file with Companies House?

Answer 43

-change of name
-change of registered office
-changes in membership
-creation of a charge
-annual confirmation statement
-accounts

Question 44

How many members must an LLP have?

Answer 44

An LLP must have at least two formally appointed members at all times. There is no limit on the maximum members. At least two members of the LLP must be ‘designated members’.

Question 45

In what circumstances will a member cease to be a member of an LLP?

Answer 45

S4(3) LLPA states that a member will cease to be a member of the LLP upon:
-their death
-agreement with the other members of the LLP
-giving notice to the other members of the LLP
-dissolution

Question 46

What is an LLP Agreement?

Answer 46

A private document which sets out the formal procedures and arrangements which the members have agreed to be the basis of the operation of their business. LLPs are not required to have a formal Members’ Agreement.

Question 47

In the absence of an LLP Members’ Agreement, what are the eleven default provisions under regulations 7 and 8 of the LLPR 2001?

Answer 47

• Members share equally in capital and profits(Reg 7(1));
• An LLP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business of the LLP (Reg 7(2));
• Every member may take part in management (Reg 7(3));
• No member is entitled to remuneration for managing the LLP (Reg 7(4));
• No person can become a member or assign their membership without the consent of all existing members (Reg 7(5));
• Ordinary decision making may be by the majority of the members. Any proposed change to the nature of the business requires unanimity (Reg 7(6));
• The books and records of the LLP must be available for inspection by the members at the registered office (Reg 7(7));
• Each member must give true accounts and full information of all things affecting the LLP to any member or his legal representative (Reg 7(8));
• If a member (without consent) carries on any business of the same nature as, and competing with, the LLP then they must account for and pay over to the LLP all profits made by them in the business (Reg 7(9));
• Every member has a duty to account for benefits derived from transactions with the LLP and its business or property (Reg 7(10));
• There is no implied power of expulsion of a member by the majority unless the members have expressly provided for such a power in a Members’ Agreement (Reg 8).

Question 48

Outline the tax treatment of LLPs.

Answer 48

For tax purposes, the LLP is treated as a partnership. It is tax transparent-the LLP is not taxed, but the partners are.
Assets held by the LLP will be treated as being held by the members as partners for capital gains tax purposes.