5b Ordinary Partnerships

Question 1

What is a partnership

Answer 1

A partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

Question 2

What is the legal status of a partnership?

Answer 2

It’s not a separate legal entity, it’s a relationship between persons. Partnership agreement is put in place to which the partners are bound by its terms.

Question 3

What are the 3 types of partnership?

Answer 3

General Partnership
Limited Partnership
Limited Liability Partnership

Question 4

What is a General Partnership?

Answer 4

Traditional type of partnership as defined by the Partnership Act 1890.
Default partnership should a partnership be formed.

Question 5

What is a Limited Partnership?

Answer 5

A partnership with two types of partners; limited partner and unlimited partner (partner with limited liability and partner within full liability).

Question 6

What is a limited liability partnership?

Answer 6

Partnership in which all partners have limited liability and can run the business and bind it in contracts.

Question 7

What are the 3 steps in forming a partnership?

Answer 7

1. Joint business activity - providing it’s not a limited/limited liability partnership, two people can informally form a partnership by beginning trade.
2. Partnership agreement - no requirement to have one but is ideal. Acts as a contract.
3. The firm - once formed the partnership becomes a firm.

Question 8

What happens if there is no partnership agreement in place?

Answer 8

The Partnership Act 1890 rules are applied.

Question 9

What are the main provisions of the Partnership Act 1890?

Answer 9

• Profits are shared equally.
• Every partner is entitled to manage the business.
• Business expenses must be repaid to partners.
• No partner is entitled to remuneration - only profits from trade.
• Partnership agreement can only be modified at the agreement of all partners.
• Change in nature of the business must be unanimous decision.
• No interest on original capital is paid (5% paid on excess).
• New partners are only admitted with the approval of all existing partners.
• A partner can be expelled by majority vote as long as the partnership allows this.
• If a partnership is dissolved, partners’ authority continues to allow affairs of the partnership to be wound up.
• If a partner owes money to the partnership which cannot be paid back, all partners have to pay it back in ratio of the original capital contributed.
• All records are kept at the place of business and available to all partners.

Question 10

What does Fiduciary Duties mean?

Answer 10

Partners owe fiduciary duties to the other partners as they have the authority to bind other partners into contract. This means that they act in the best interest of the partnership as a whole and protect its financial interests. Breach could mean that the partner is liable to the firm.

Question 11

How does a partnership come to an end?

Answer 11

• Death or bankruptcy of a partner.
• Expiry of a fixed term.
• Completion of a single joint venture.
• Continuation of the partnership would be illegal.
• A partner gives notice for the firm to be dissolved.
• Order of the court.
  All subject to what the partnership agreement says.

Question 12

Under what circumstances can the court bring a partnership to an end?

Answer 12

• Partner has mental disorder or permanent incapacity.
• Partner engages in activity prejudicial to the business.
• Partner persistently breaches partnership agreement.
• Business can only be carried on at a loss.
• It is just and equitable to do so.