BLP WK 1 Flashcards by John McVea

What is the definition of a traditional partnership?

A relationship where two or more persons carry on a business together with a view to profit.

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What is the legislation that governs traditional partnerships?

The Partnership Act 1890 (PA 1890).

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Is there a formal process for establishing a partnership?

No, a partnership can arise even without the partners being aware if the criteria in s 1(1) of the PA 1890 are met.

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Is a partnership a separate legal entity?

No, partners are collectively referred to as a “firm.”

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What is the minimum number of persons required to form a partnership?

At least two persons, which may include companies.

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What factors can indicate the existence of a partnership?

Evidence of profit-sharing and decision-making by all individuals.

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Does a loan or a situation where someone is not held out as a partner constitute a partnership?

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Why are partnerships favoured?

Lack of formality, confidentiality, and minimal regulatory requirements compared to companies.

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Do partnerships require public filings or disclosures?

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Why might clients avoid forming a partnership?

Concerns about unlimited liability

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What type of duties do partners owe each other?

Fiduciary duties, similar to trustees and beneficiaries.

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What are some examples of fiduciary duties owed by partners?

Honest and full disclosure, prohibition of unauthorized personal profit, and avoidance of conflicts of interest.

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What is the nature of partners’ liability for the firm’s obligations?

Partners are personally liable.

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What is joint liability in the context of a partnership?

All partners are equally responsible for contractual debts incurred while being a partner.

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What is joint and several liability in the context of a partnership?

Each partner can be held liable for the full amount of a tortious act.

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Is a new partner liable for the firm’s prior debts?

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Can retired partners still be liable for the firm’s debts?

Yes, unless novation occurs.

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What is holding out liability?

When a person who is not a partner is held liable for partnership debts because they allowed themselves to be represented as a partner.

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What are the three elements for holding out liability?

(1) Representation as a partner,
(2) a third party acts in response, and
(3) the third party believes in the representation.

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When can a partner bind the firm in contracts?

If the act is related to the business type and carried out in the usual way.

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What are the exceptions to a partner’s ability to bind the firm in contracts?

If the third party knew the partner was not authorised or did not believe they were a partner.

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How can a non-partner bind the firm in contracts?

Through apparent authority, such as being represented as a partner (holding out).

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How are partnerships taxed?

They are tax transparent.

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Does the partnership itself pay taxes?

No, individual partners are taxed on their share of the profits.

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How is income tax handled in a partnership?

Each partner is responsible for their own share of the partnership's income.

How is capital gains tax handled in a partnership?

Partners are taxed on their fractional share of any gains from the disposal of partnership assets.

When does a partnership agreement override the PA 1890?

When the agreement addresses a topic covered in the PA 1890.

What is the purpose of a partnership agreement?

To outline the terms on which partners will run the business, overriding the default provisions of the PA 1890.

What should a partnership agreement state regarding the partnership's commencement?

A formal commencement date.

If partners start working together before the partnership agreement's date, what applies until the agreement begins?

The PA 1890.

Can partnerships have a fixed term?

Yes, or they can continue until terminated as per the agreement.

If a partnership term expires and the partners continue without a new agreement, on what terms are they presumed to be working?

On the same terms as the expired agreement.

Are there any restrictions on the partnership name?

Yes, it must comply with restrictions (e.g., no "limited", "LLP", or offensive terms).

Does a partnership have a separate legal personality?

No, partners own a share in the property.

What determines whether an asset is partnership property?

The intention at the time of acquisition.

According to s 20 of the PA 1890, what is the status of property brought into the firm?

It is considered partnership property.

According to s 21 of the PA 1890, what is the status of property bought with partnership funds?

It is deemed to belong to the partnership unless otherwise agreed.

What is the default rule regarding the sharing of capital, profits, and losses?

Partners share equally.

What is a profit-sharing ratio (PSR)?

A ratio set out in the partnership agreement to dictate how profits are shared, particularly if contributions vary.

Can partners draw income from profits?

Yes

If there is no partnership agreement, how are income profits shared?

Equally

If a salary is intended in addition to a profit share, must it be explicitly stated in the partnership agreement?

Yes

Can every partner participate in the partnership's management?

Yes, but they are not required to.

What should the partnership agreement define regarding work input?

The work input and roles of each partner, and any authority limits.

What is the typical decision-making process in a partnership?

Majority rule.

Which partnership decisions require unanimous consent?

Changes to the partnership business, introducing a new partner, and varying partner rights and duties.

Can partners be expelled by majority vote?

No, unless previously agreed upon.

Without provisions for partner departure, what happens to the partnership when a partner leaves?

It is dissolved.

Can non-compete clauses be applied to outgoing partners?

Yes, subject to reasonableness in duration, area, and scope.

What happens to surplus assets upon the dissolution of a partnership?

They are distributed based on an agreed asset surplus ratio (ASR). If none, the profit share ratio (PSR) applies.

What are the two types of liability partners share?

○ Contractual Liability: Joint liability (s 9 PA 1890). ○ Tortious Liability: Joint and several liability (ss 10 and 12 PA 1890).

When is a retired partner no longer liable for partnership debts?

When novation occurs, releasing them from past obligations.

How can a non-partner be bound by a partnership contract?

If they act with apparent authority, like being held out as a partner, creating a reasonable belief in the third party.

What are the tax implications for individual partners?

Partners are personally taxed on their share of the partnership's income and capital gains, based on the profit-sharing ratio.

When does the PA 1890 act as a default?

When there is no partnership agreement, or when the agreement is silent on specific matters.

What is the significance of section 19 of the PA 1890?

It allows partners to change their rights and obligations by unanimous consent, even if initially defined in the agreement.

What happens if the partnership continues after the agreed term ends?

It is presumed to continue under the same terms as the original agreement (s 27 PA 1890), unless a new agreement is made.

How is ownership of partnership property typically determined?

○ Intention at the time of acquisition. ○ Assets brought into the firm (s 20 PA 1890). ○ Assets bought with partnership funds (s 21 PA 1890).

What are the options for distributing profits and losses?

Partners can: ○ Share equally by default (s 24(1) PA 1890). ○ Define a specific profit-sharing ratio (PSR) in the agreement.

Do partners have a right to a salary?

No, not unless explicitly stated in the partnership agreement (s 24(6) PA 1890).

What are the exceptions to majority rule in decision-making?

Unanimous consent is needed for: ○ Changing the partnership business (s 24(8) PA 1890). ○ Introducing a new partner (s 24(7) PA 1890). ○ Varying partner rights and duties (s 19 PA 1890).

Why is it important to include expulsion provisions in the partnership agreement?

Without them, it is nearly impossible to remove a partner without dissolving the partnership (s 25 PA 1890).

What should the partnership agreement address regarding a partner leaving?

It should outline provisions for the continuation of the partnership and the buyout process for departing partners.

What are some triggers for the dissolution of a partnership?

○ Expiry of the fixed term (s 32(a) PA 1890). ○ Completion of a specific venture (s 32(b) PA 1890). ○ Death or bankruptcy of a partner (s 33 PA 1890). ○ Illegality of the partnership business (s 34 PA 1890).

If there is no asset surplus ratio (ASR) defined, how are surplus assets distributed upon dissolution?

According to the profit-sharing ratio (PSR) (s 44(b)(3) & (4) PA 1890).