6: Types of Trade

Question 1

What types of trade do we look into?

Answer 1

Sole traders

Ordinary partnerships

LLPs

Registered companies

Question 2

Key info on sole traders?

Answer 2

Single person owns and runs the business

May engage employees or work independently

No distinction - not a separate legal entity

Question 3

Ads of sole trader?

Answer 3

Keep all profits

No formal procedure to set up

Independnece

Self accountability/lack of regs

Question 4

Dis of sole trader?

Answer 4

Risk - has to pay all debts

Limited options for capital injection

High dependent on owner

Success dependant on owner’s skills

Question 5

3 types of partnership?

Answer 5

Ordinary

LLP

Limited - now very rare

Essentially two sole traders running together

Question 6

What is the definition of partnership?

Answer 6

The relation which subsists between persons carrying on a business in a common view of profit

• PA 1890

Question 7

What makes a ‘business’ a business?

Answer 7

Includes every trade, occupation or profession

Must be some joint business activity, and deffo some activity! Owning property not enough

Can be a single transaction

Date bank account is opened is when a partnership begins

Question 8

What are not partnerships?

Answer 8

Charities or mutual benefit schemes
- Business must yield a profit!

Question 9

Why form a partnership?

Answer 9

Subject to legal rules which affect individuals, not companies

Special rules that only apply to partnerships

Become a ‘firm’ - companies cant do that!

Question 10

Why form a partnership?

Answer 10

Subject to legal rules which affect individuals, not companies

Special rules that only apply to partnerships

Become a ‘firm’ - companies cant do that!

Question 11

Two ways a partnership is formed?

Answer 11

Informally

Partnership agreement (contract)

Question 12

What is the Partnership Act 1890?

Answer 12

Sets out the rights and duties of the partners

Only if provisions of agreement do not deal with issue

Can be overruled by any express agreement between partners

Question 13

Main acts of PA1890?

Answer 13

Sharing of profit and losses

Every partner can take part

Must indemnify members

No remuneration

Agreement varied with content of all partners

Any change in natural of business must be unanimous

No interest on original capital

New partners admitted with approval of all

Partner can be expelled - majority

Affairs can be wound up

Capital deficiency is shared between partners in ratio

Records kept at place of business

Question 14

What are fiduciary duties?

Answer 14

Every partner is an agent, must carry out work in good faith

Can be liable otherwise

Question 15

How can a partnership automatically end?

Answer 15

Death or bankruptcy of partner

Expiry of fixed term

Completion of a single joint venture

Continuation would be illegal

Parter gives notice

Order of the court

Anything in partnership agreement

Question 16

How can the court bring partnership to an end?

Answer 16

Mental disorder or permanent incapacity

Partner engages in prejudicial activity

Partner persistently breaches agreement

Business carried on at loss

Just and equitable to do so

Question 17

Two kinds of authority of partners?

Answer 17

Express or actual

Implied or apparent - an agent

Question 18

Two kinds of authority of partners?

Answer 18

Express or actual

Implied or apparent - an agent

Question 19

What happens if a partner exceeds authority?

Answer 19

If it is within the usual business of partnership, it’s fine, unless:

• they have no actual authority

AND

• third party either knows they have no authority, or does not believe them to be a partner

Question 20

What is joint and several liability?

Answer 20

Outsiders can take action individually or collectively

If damages are recovered from one party, other partners liable to contribute equally to amount paid

Question 21

Who is liable in a partnership?

Answer 21

Every parter is jointly and severably liable

New partners - no liability for before they came

Retiring partners - liable until notice of retirement

Change or partners - old partners liable until third party has notice

Novation - the continuing or new partner will take on liability for debt of outgoing partner

Indemnity - continuing or new partner may agree to identify outgoing partner

Question 22

Other key features of partnerships?

Answer 22

Limits on transfer of share

Can only have fixed charges for borrowing - no floating

Partners can withdraw capital

No admin requirements for meetings

Can dissolve automatically or by agreement

Pays income tax!

Question 23

What is an LLP?

Answer 23

Incorporated partnership with legal personality sepeate

Less regulation that companies

LLP Act 2000

Question 24

How to form an LLP?

Answer 24

Incorporation document sent to registrar, must include:
- name
- location
- address
- name and addresses of memmbers
- statement saying which members are designated members
- statement by solicitor or someone saying requirements of Act have been satisfied

Certificate will be issued!

Question 25

What covers LLPs?

Answer 25

LLP regs 2001

AND

Partnership act 1890

When an issue isnt covered

Question 26

LLP: members?

Answer 26

No maximum no of members

New members admitted with agreement

A person ceases by giving reasonable notice
- notify registrar in 14 days

Every member can take part in management

Members can apply to court in unfair prejudice

Question 27

LLP: books and records?

Answer 27

Obligations same for companies
- SMEs get same exemptions from audit etc

No requirement for directors report

LLP must
- maintain register of charges
- notify registrar of changes to membership or office
- name, on correspondence and outside
- confirmation statement

Question 28

LLP: authority or liability?

Answer 28

Partnership is primarily liable

Every member is agent though and can bind / not bind partnership by same conditions as regular partnership

Members will not incur personal liability
- each owes duty of care
- each can be liable for F or W trading

Question 29

LLP: termination and insolvency

Answer 29

Done by agreement of the members unanimously

When this happens, members may:
- propose voluntary arrangement
- put company in administration
- liquidation

Withdrawals in two years prior can be clawed back if member knew it would become insolvent

Members may be called on to contribute to the assets of the LLP to extent the agreed to

Question 30

What is an LLP?

Answer 30

Artificial legal entity with perpetual succession.

Can hold property in its own right, enter into contracts in its its own name, create floating charges, sue and be sued

Liability limited to the amount of capital they have agreed to contribute