Business 2: Partnerships Flashcards
What is a partnership?
Relationship which exists when:
two or more people
carry on a business in common
with a view of profit
What should be considered for ‘business in common’?
(NOT conclusive)
Do the individuals all take part in decision- making?
Whose names are on the title deeds of any property?
How are profits/losses shared?
What is the default contract (partnership agreement) for a partnership?
PA1908 provides default contract
UNLESS other terms agreed (can be oral agreement or by conduct)
What parts of the Partnership Act 1890 CANT be overridden by agreement?
- When a partnership comes into existence
- relationships between partners and 3rd parties
What are the suggested provisions for a partnership agreement?
Name
Place & nature of business
Commencement & duration
Work input
Roles
Decision making
Financial input
Shares in income, capital profits, losses
Drawings (income profits partners receive) and salaries
Ownership of assets/property
Expulsion
Dissolution
Goodwill
Distribution of proceeds of sale of business
Restraint of trade
Dispute resolution
What must a partnership name NOT be?
Inc. limited, ltd LLP PLC
Be offensive
Be same as existing trademark
Contain a ‘sensitive’ word/expression or suggest connection with gov/la without permission
When does a partnership commence?
when def in s1 PA 1890 satisfied (=may come into existence when planning started)
In the absence of contrary agreement, what are the rules about amount of time spent working in a partnership/time off?
- No obligation to work full-time BUT can be implied through conduct/course of dealings.
- No automatic right to time off due to ill-health or injury
- Common PA clause= state that partner must devote the whole of their time and attention to the business.
Common clauses re. work input in a PA?
State that partner must devote the whole of their time and attention to the business
* Advisable to state that partners must not engage in any other business
* No -compete clauses common AND implied under PA 1890.
* Set out holiday, sickness, maternity, paternity (no provisions in PA)
Roles-Scope of duties/responsibilities and restrictions
How are decisions made in a partnership unless otherwise stated?
Majority needed for all decisions
EXCEPT unanimity needed for:
1. Changing the nature of the business
2. Introducing new partner
3. Changing the terms of PA (s 19 PA 1890, and also the general contractual principle that contracts can only be varied with the consent of all the parties).
How are income, capital losses profits and losses shared in a partnership unless otherwise stated?
- INCOME: Equal regardless of hours worked unless agreed otherwise
- CAPITAL: equal regardless of initial contrib BUT can be inferred/established from a course of conduct that the partners entitled to capital
What is the difference between capital profits and income profits?
- Capital profits-one off gains
- Income profits-recurring
What property will be ‘partnership property’
Property bought with partnership money and used for the purposes and in the course of the partnership business
Rules on expelling a partner
*PA, s25-No majority of partners may expel another unless partners have expressly agreed to this
* May inc clause saying partner can be expelled if conducted themselves in certain way
How can a partnership be dissolved under PA?
- Partner retired
- On expiry of fixed term (can be disapplied)
- Death/bankruptcy of partner (can be disapplied)
- Notice
- Partners give notice of dissolution to a partner who has granted a charge over their share of the partnership prop, for a debt owed by them alone and not the partnership as a whole (can be disapplied)
- Something happens which makes it unlawful for firm business to be carried on (cant be disapplied)
- Court order
When can the court order that a partnership be dissolved?
□ Partner becomes permanently incapable of performing their part of PA
□ A partner’s conduct is prejudicial to the business
□ A partner wilfully or persistently breaches PA
□ The partnership can only be carried on at a loss;
the court thinks its just and equitable to order that the partnership be dissolved
What is the effect of dissolution?
Unless otherwise agreed, partnership must end and all assets sol
Outgoing partner can insist business sold
If not provided for, outgoing partner entitled to interest rate of 5% per Anum on value of partnership until share received
What is it good to add into a PA re. dissolution?
- Provide for partial dissolution so remaining partners continue in partnership if one leaves
- Add provisions setting out if other partners must buy outgoing partners share/ in instalments.
- Add provision containing indemnity in favour of outgoing partner if liabilities taken into acc when share valued
What is goodwill?
Business reputation and value of clients and conduct
2y profit often taken as value of goodwill
Under PA 1890 how are there sale proceeds applied on sale of the business?
- Creditors paid in full, from priv assets if there’s shortfall
- Partners who’ve lend money must be repaid outstanding amount inc interest.
- Partners must be paid entitled share of partnership capital
- Surplus shared between partners in accordance with terms of agreement
What is a restraint of trade clause and is it implied by PA?
Clause seeking to restrict outgoing partners in business dealings once left Not implied by PA
When are restraint of trade clauses enforceable?
Only enforceable if protects legit business interest
What do restraint of trade clauses include?
Non compete clauses-prevent competing with partnership business
Non solicitation clauses-no soliciting clients
Non dealing clauses-no contracts with clients, former clients, employees
What are partners responsibilities to each other?
Common law: Owe duty of the upmost fairness and good faith
PA 1890:
Share profits (and losses) equally
Bear a share of any loss in accordance with PA
Indemnify fellow partners who’ve borne more than their share of liability/expense
Be completely open re relevant partnership info
Account to firm for priv profits earned (from transaction concerning partnership) without others consent
Don’t compete with firm (ie. Carry on any business of same nature as/competing with that firm) (if they do, must account for and pay all profits made)
When will the firm be bound by a contract entered into by the firms name?
- Partners acted jointly
OR - Express actual authority (explicit permission)
- Implied actual authority (inferred through course of regular dealings/usual conduct)
- Apparent (aka. Implied) authority):
a. Transaction relates usual type of business (objective)
b. Transaction one for which a partner would usually be expected to have authority in that type of firm (objective)
c. 3rd party didn’t know they didn’t have authority (subjective)
d. 3rd party know/believe them to be a partner at time of transaction (subjective)
When may a partnership be liable in tort?
firm is liable for any wrongful act or omission of a partner who acts in the ordinary course of the firm’s business or with the authority of their partners.
Which partners have personal liability for partnership debts (incoming/outgoing/current partner/death/bankrupcy)?
- Incoming partners: NOT liable for debts existing before they joined UNLESS novation agreement
- Current partners: Jointly and severally liable for debts incurred when they were partner
- Outgoing partners: Remain liable for depts incurred when they were partner
- Death/Bankruptcy: estate/PRs NOT liable
How can outgoing partners ensure they are not liable for future debts?
Parties who HAVE dealt with firm before: give actual notice of retirement
Parties who HAVENT dealt with firm before: ‘Notice to whole world’ by placing notice in London/Edi/Belfast Gazette (UNLESS reason is death/bankruptcy, no notice required and estate not liable)
OR Novatation agreement
OR Indemnity agreement (in relation to existing debts)
What is a novatation agreement?
◊ Retiring partner released from existing debt by entering into contract with creditor and other partners.
◊ Creditor will release the original partners from their liability under the contract and instead the firm as newly constituted take over liability.
◊ If partner retiring and no new joining-must be consideration for creditors promise to release to be contractually binding OR be a deed
What is an indemnity agreement in relation to existing debts
◊ remaining partners agree to indemnify retiring partner for any liability the retiring partner incurs post-retirement.
◊ But DOES NOT BIND CREDITOR, who can still sue retiring partner
What is holding out?
When creditor of partnership has relied on representation (oral/writing/conduct) that someone is partner may be able to hold that person liable for firms debt
Who are the potential defendants for enforcing a firms liabilities?
- Partner(s) with who they made contract (privity of contract )
- Anyone who was a partner at time debt was occurred Firm (partners at time will be jointly and severally liable)
(Best to sue firm as judgement can be enforced against partnership assets/personal assets )
Rules for insolvency of a partnership
○ Can be wound up as unregistered Co
○ Can use rescue procedures available to Co.
○ individual partners may be made bankrupt if an obligation is enforced against their personal assets and there is still not enough to meet the partners’ liabilities
Tax position of partnerships
Partners may need to pay VAT, NI and either income or corporation tax depending on if partner is co. or individual
What is an LLP
Introduced by Limited Liability Partnership Act 2000
Are corporate bodies with sep identity from members
How are LLPs governed
LP Regulations 2001-default contract in absence of other agreement
LLP (application of CA 2006) Regulations 2009-certain sections of CA 2006 also apply to LLPs
Legal requirements for members of LLP
□ Must have at least 2 members on incorporation
□ 2 members designated to file docs at CH
□ If members reduces to 1 for more than 6mo, that person is jointly and severally liable for any of the LLPs debts incurred from 6mo period onwards
Requirements for name of LLP?
□ Must end in llp, limited liability partnership or welsh equiv
□ Unless name is wholly the names of all partners, similar restrictions as for Cos apply
□ must have name on the outside of its place of business and its stationery must state its name, place of registration and registration number
What duty do designated members of an LLP owe to the LLP?
duty of reasonable care and skill to LLP
What are designated members of an LLP responsible for?
Admin/legal matters, inc:
□ signing and filing annual accounts with the Registrar;
□ app, removing & remunerating auditors
□ filing annual confirmation statement;
□ sending notices to Registrar (eg. concerning a member leaving or joining)
□ winding up the LLP
What happens to an LLP re liquidation?
Co liquidation regime under IA 1986 applies to LLP and its members =members may be liable for:
1. Misfeasance
2. Fraudulent trading
3. Wrongful trading
And required to contrib to assets of insolvent LLP
Co Dirs Disqualification Act 1986 applies to members of an LLP
What do members of an LLP owe to the LLP as its agents?
Fiduciary duties inc:
□ Duty of good faith
□ Duty to account for money received on behalf of LLP
□ Duty to other members to give full info on acc/matters concerning LLP
Who can own property in an LLP
the LP itself
Procedure for appointment of new partner in LLP
Notify registrar within 14d app via form LL APO1 (individual) or LL APO2 (corporate member) at CH Give members service address, (can be the LLP’s place of business) and residential address, full name, former names and DoB
Procedure when member leaves an LLP
File form LLTM01 (individual) LL TM02 (corporate member) at CH within 14d
Common terms to inc in an LLP agreement
Capital and profits
Management and decision making
Leaving LLP
Rules for capital and profits in LLP under LLP Regs 2001
Members share equally in capital and profits
□ Nothing on losses (borne by LLP itself) (=Members may only loose capital contributions/not be repaid for loans)
Rules for participation in LLP under LLP Regs 2001
Every member may participate in management
Not entitled to remuneration
Rules for decision making under LLP under LLP Regs 2001
Ordinary matters decided by majority of members
BUT Unanimity needed for:
*Changing terms of contract
*Changing nature of business
Rules for leaving LLP under LLP Regs 200?
Members can leave by giving reasonable notice to other members
Cant be expelled (so must include right in LLP agreement)
If wish bankruptcy of one member to automatically terminate their membership of LLP, inc. in LLP agreement
Requirements when leaving LLP
Notify CH via form LL TM01 within 14d
Advantages of LLPs
§ Limited liability
Can grant fixed/floating charges over assets
Leeway with management/structure
Can app administrator
Disadvantages of LLP
Admin/accounting requirements
Docs made available for public inspection
Subject to potential clawback provisions on insolvency
