Business Law

Question 1

What is a partnership?

Answer 1

When two or more people establish a business together with an aim of making profit.

Question 2

How does the Partnership Act 1890 relate the way partnerships are run?

Answer 2

PA 1890 provides a default contract for partnership which will apply unless the partners enter into their own partnership agreement.

However, some sections cannot be overridden such as how the partnership comes into existence or how the partners will share liability for debts.

Question 3

What are the advantages of a partnership?

Answer 3

• Informal - no legal requirements
• No need for a written contract - can be verbal or implied

Question 4

What is the situation of debt liability in partnerships?

Answer 4

The partners are personally liable for any business debts.

Question 5

In a partnership, how are the profits/debts shared under the Partnership Act 1890?

Answer 5

Equally between the partners.

However, this can be changed if the partners draft their own partnership agreement.

Question 6

In a partnership, how can a partner expel another partner under the Partnership Act 1890?

Answer 6

It is impossible to expel another partner unless the partner’s have written their own partnership agreement which allows a majority vote to expel a partner.

Question 7

How can a partnership be ended under the Partnership Act 1890?

Answer 7

Either partner can choose to end the partnership at any time by giving notice to all other partners.

This gives little protection to the partners so it is recommended that the partners insert their own rules in regard to ending the partnership.

Question 8

Under the Partnership Act 1890, how is a partnership dissolved?

Answer 8

• When a partner retires
• On the expiry of a fixed term
• By death or bankruptcy of any partners
• If a partner gives notice

Question 9

What happens to the leaving partner’s share under the PA 1890?

Answer 9

If no provisions included, the PA 1890 states that the leaving partner will be entitled to an interest rate of 5% per annum on the value of their share until the other partners buy them out.

Question 10

Under the Partnership Act 1890, how are the proceeds of sale distributed?

Answer 10

1) Creditors of the firm must be paid in full.

2) Partners who have lent money to the firm must be re-paid.

3) Partners must be paid the share of the partnership’s capital to which they are entitled.

4) Any surplus is shared between the partners in accordance with their partnership agreement.

Question 11

In a partnership, what are the partners liability to third parties?

Answer 11

a) Actual Authority - the firm is bound by any contract entered into by a partner provided the partner’s actions were authorised by all of the partners (acted jointly, express authority, implied authority)

b) Apparent Authority - the firm may be liable for the actions of a partner even if their actions were not authorised if it appeared to an outsider that the actions were authorised.

Although in this scenario the firm will be liable to the third party under the contract, the partner who acted under apparent authority will become liable to all other partners.

Question 12

What is the debt liability situation for a partner who is leaving the partnership?

Answer 12

a) Debts incurred before leaving the partnership - the leaving partner will be liable for these debts in accordance with the partnership agreement.

b) Novation agreement - where the other partners agree to take over liability for the leaving partner’s debts. The leaving partner is released from liability.

c) Debts incurred after leaving the partnership - a partner will not be liable for any debts incurred after leaving the business.

Question 13

How must third parties/clients be informed of the departure of a partner?

Answer 13

a) anyone who has dealt with the firm before the partner decided to leave must be INFORMED DIRECTLY.

b) anyone who has not had dealings with the firm before the partner decided to leave must be notified via A NOTICE IN THE LONDON GAZETTE.

Question 14

What is ‘holding out’ in relation to partnerships and liability.

Answer 14

If a creditor has relied on a representation that a particular person was a partner at the firm, but the partner has departed the partnership, the departing partner may still be held liable for the firm’s debts.

Question 15

What tax is paid in a partnership?

Answer 15

Partners need to pay VAT, national insurance and income tax.

Question 16

What happens when a partner cannot pay their debts?

Answer 16

They are personally liable for the debts and so the creditors/lenders can seize their personal assets and/or obtain a charge over the partner’s property and apply for an order for sale to satisfy the debt.

Question 17

What is a Limited Liability Partnership?

Answer 17

A hybrid between a partnership and a company.

Question 18

What are the advantages of an LLP?

Answer 18

• The partners have limited liability for the LLPs debts.
• Fewer legal requirements/formalities than a company.

Question 19

How many members must be in an LLP?

Answer 19

Two at a minimum.

If this drops to one member for a period of more than 6 months, the remaining partner will be personally liable for the debts incurred after the 6 month period.

Question 20

How should a change in membership in an LLP be notified.

Answer 20

Deliver a notice to the Registrar of Companies within 14 days of the new appointment.

Question 21

What is the formula for calculating a businesses taxable trading profit?

Answer 21

Chargeable receipts LESS deductible expenditure LESS capital allowances = trading profit

Question 22

What are chargeable receipts?

Answer 22

Money received for the sale of goods and services.

Question 23

What is deductible expenditure?

Answer 23

Income which is wholly and exclusively for the trade (e.g., salaries, rent on commercial premises, utility bills etc.)

Question 24

What are capital allowances?

Answer 24

Plant and machinery - apparatus used by business to carry out their trade - e.g., computers, tools, farming machinery.

Question 25

What is a ‘writing down allowance’ for plant and machinery?

Answer 25

The value of the plant and machinery is reduced by 18% of its value every year. This reduces the tax due on the machinery.

E.g., Three years ago, a company bought an item of machinery to use in its ceramic business for £100,000.

Year 1 - machine valued at £100,000
18% of £100,000 = £18,000
Written down value = £82,000

Year 2 - machine valued at £82,000
18% of £82,000 = £14,760
Written down value = £67,240

Year 3 - machine valued at £67,240
18% of £67,240 = £12,104
Written down value = £55,136

Question 26

What is Annual Investment Allowance in relation to plant and machinery?

Answer 26

Up to £1 million of the cost of ‘fresh’/new plant and machinery will be deducted.

E.g., a farmer buys a tractor for £1,500,000. In the accounting period in which the tractor was bought, the farmer can deduct £1,000,000 from the chargeable receipts.

NOTE: for companies, the deduction is uncapped meaning the total cost of the fresh plant or machinery can be deducted from the chargeable receipts.

Question 27

How is income tax calculated?

Answer 27

Step 1) Calculate the person’s TOTAL INCOME

Step 2) Deduct any allowable reliefs to calculate their NET INCOME

Step 3) Deduct any personal allowances to calculate their TAXABLE INCOME

Step 4) Seperate NSNDI, savings income, and dividend income and calculate tax on each type of income at the applicable rates.

Step 5) Add together the tax from step 4 to calculate the overall INCOME TAX LIABILITY

Question 28

What is the current personal allowance?

Answer 28

£12,570

When a person earns more than £100,000 a year, they have an adjusted personal allowance

Step 1) NET income LESS £100,000 DIVIDED BY 2

Step 2) £12,570 - answer to step 1.

Question 29

What is a blind person’s allowance?

Answer 29

A further £2,870 is deducted on top of £12,570