BLP - Week 1 Partnerships and LLPs Flashcards
What are the key business models?
Sole Traders, Partnerships, LLPs, Companies
Do sole traders and partnerships have incorporation costs?
No. Sole traders have no formal incorporation requirements. Partnerships may incur legal costs for partnership agreements.
Do LLPs and companies have incorporation costs?
Yes. Both LLPs and companies must register with Companies House.
What is the liability status for sole traders and partnerships?
Unlimited liability. Sole traders’ personal assets can be used to cover debts. Partnerships have unlimited joint liability in contract and unlimited joint and several liability in tort.
What is the liability status for LLPs and companies?
Limited liability. LLP members are liable only to the agreed contribution. Company shareholders are liable only for unpaid shares.
If all shares are paid in a company, shareholders will not have to contribute any further amount to the company on insolvency.
What are the structural differences between business models?
Sole traders and partnerships are informal structures and are not a separate legal entity, whereas LLPs and companies are separate legal entities.
As a separate legal entity, the LLP and company own property and enter into contracts on its own behalf.
How do different business models raise finance?
- Sole traders and partnerships raise finance personally.
- LLPs and companies can borrow in their own name and create floating charges.
- Companies can raise debt and equity finance and provide security.
How are business models taxed?
- Sole traders and partnerships are tax transparent (profits taxed as income tax and chargeable gains as CGT).
- LLPs are treated like partnerships.
- Companies pay corporation tax and face double taxation on dividends.
How is a partnership formed?
- Under s1.1 Partnership Act 1890, a partnership exists when two or more persons carry on a business in common with a view to profit.
- There doesn’t need to be intention to form a partnership.
What factors determine a partnership’s existence?
Profit and loss sharing, joint property ownership, participation in decision-making, and mutual agreement.
What are the fiduciary duties of partners?
- Honest and full disclosure
- No unauthorized personal profits.
- No conflict of duty and interest
What is the liability of partners in a partnership?
- Partners are personally liable for debts.
- Contractual liability is joint - every partner is liable jointly with other partners for all the debts and obs of the firm incurred whilst they were partners.
- Tortious liability is joint and several.
Tortious liability: partner must cause loss or injury by act/ommission in the ordinary course of business.
What is the liability of new partners for debts incurred before they joined?
New partners will not automatically be liable re debts incurred before they joined.
When will a new partner be liable?
- A new partner will be liable till after they retire re debts incurred by the partnership whilst they were a partner.
- To relieve the partner of liability once they retire, a partnership may novate the relevant agreement with the consent of the creditor.
How can a former partner remove liability?
Former partner will not be liable for debts to any third party who did not know them to be a partner before they left.
- Former partner must notify the change either by:
* Actual notice for those who have had actual dealings with the partner;
* Constructive notice - publication of departure in the London Gazette, for those who have not had previous dealings with the partner.
What is the liability of those holding out as partners?
A person may be personally liable on a partnership debt if they held themselves out as a partner or have knowingly allowed themselves to be held out.
Remember - liability is on the person and not the firm.
What are the elements needed for a person holding out to be a partner to be held liable?
- A representation to a 3rd party to the effect that they are a partner
- Third party acted in response to the representation (i.e., gave credit to the firm by supplying goods or services to the firm*)
- The third party must have believed in the representation
- Only applies where credit is given to the firm. This is construed widely - e.g., where goods are delivered or monety lent.
When is a Firm Bound by a Contract (partner and non-partners)?
- Non-partners: Bound only if common law agency principles apply.
- Partners: Bound if s.5 PA 1890 applies - apparent authority.
What is the common law agency principle?
- If all partners approve, the contract binds the firm (actual, express, or implied authority).
- Even without prior authority, the firm is bound if partners ratify the contract.
What is s.5 PA 1890? [Apparent authority]
- A firm can be bound by a partner’s actions even if other partners object.
- Focuses on third-party perception to protect them.
- A firm is bound if the contract:
- Relates to the firm’s usual business type.
- Is conducted in the usual manner for such business.
- The third party didn’t know they weren’t authorised.
What are the exceptions to the apparent authority rule? / When will the firm not be bound by partner’s actions?
- The third party knew the partner lacked authority, or
- The third party didn’t believe the person was a partner.
When no partnership agreement exists, what are the default provisions of PA 1890?
- Profits & Losses: Shared equally, regardless of capital contributions.
- Remuneration: No salary for partners.
- Decision Making:
- Ordinary decisions: Majority vote.
- Change in business nature: Unanimous vote.
- Expulsion: A partner cannot be expelled by majority vote unless previously agreed.
What are the key clauses in a partnership agreement?
- Commencement & Duration: Partnership starts when s.1(1) PA 1890 is satisfied.
- Partnership Name: Must not include “Ltd,” “LLP,” “PLC” or be misleading/offensive.
- Partnership Property:
Owned collectively by partners.
S20 PA 1890: Assets bought for the firm belong to the firm. - Profit & Loss Sharing: Should explicitly set out profit-sharing ratio (PSR).
- Drawings & Salary: Partners take drawings, but no salary unless agreed.
- Work & Authority: Defines partner roles and decision-making limits.
- Expulsion: Without an expulsion clause, a partner cannot be removed.
- Leaving the Partnership:
Under PA 1890, any partner leaving dissolves the partnership. - Agreement should prevent dissolution and outline buyout terms.
- Non-Compete Clause:
PA 1890 default: A partner must account for profits from competing businesses. - Agreements can restrict outgoing partners from:
Competing with the firm.
Soliciting clients/employees.
How can a partnership be dissolved?
Automatic dissolution on expiry of term, completion of venture, death/bankruptcy of partner, or illegality. Dissolution by notice or court order is also possible.
How are assets distributed on dissolution of a partnership?
- Creditors are paid back
- Repaying loans received from partners
- Each partner paid back their original capital
- Remaining balance divided between partners according tot their Asset Surplus Ratio. If there is no ASR, it is divided according to their Profit Sharing Ratio. If there is no PSR, then surplus assets shared equally.
What are the key characteristics of LLPs?
Separate legal entity, limited liability, corporate filing obligations, ability to create floating charges, and flexibility in management.
How is an LLP formed?
Two or more persons (natural or legal) register an LLP at Companies House by submitting Form LL IN01.
What are the default provisions for LLPs under the Limited Liability Partnerships Regulations?
- Members share equally in capital and profits
- All members may take part in management
- No remuneration unless agreed
- Ordinary decisions require a majority vote
- Any proposed change to the nature of the LLP’s business requires the consent of all the members
- No person can become a member or assign their membership without the consent of all existing members
- Any member that carries on business competing with the LLP w/o consent must account profits to the LLP’s
How are LLPs taxed?
LLPs are tax transparent. Members are taxed on their individual share of profits and chargeable gains rather than the LLP itself.
What are the types of companies?
Private limited companies (by shares or guarantee), public limited companies (plc), and listed companies.
Who are the key players in a company?
Shareholders (owners), directors (managers), and persons with significant control (PSCs).
What is the significance of separate legal personality?
Companies own assets, enter contracts, and incur debts in their own name. Shareholders have limited liability.
What are the differences between private and public companies?
Private companies: No minimum share capital, no requirement for an AGM, can use written resolutions, minimum no of directors is 1.
Public companies: Minimum share capital of £50,000, must hold AGMs, cannot use written resolutions, minimum no of directors is 2.
What are the three key elements for contract formation?
Agreement (offer & acceptance), intention & capacity, and consideration.
How can a contract be terminated?
Performance, agreement, breach, expiry, or frustration.
What remedies are available for breach of contract?
Damages (liquidated or unliquidated), specific performance, and injunctions.
What is the principle of agency in contracts?
Agents can bind principals in contracts if they have actual or apparent authority.
