Business law II Partnerships

Question 1

Define a partnership

Answer 1

Partnership Act 1890: the relation which subsists between persons carrying on a business in common with a view of profit

2 as a couple

Question 2

Does the partnership have to be formed with only natural persons?

Answer 2

the combination of persons, companies and persons and companies and companies are permitted forms of partnership

Question 3

Meaning of ‘business in common’ and ‘a view to profit’ for the purpose of Partnership Act 1890

Answer 3

Business is buying or selling goods or providing services for a fee;

‘In common’ means people conducting the business operate in together - they have a right to make a decision about the business

a view to: the parties are hoping to make a profit from their joint business

Question 4

When does the presumption of partnership start to arise? How can this presumption be rebutted?

Answer 4

the prima facie evidence is the share of profits. This can be rebutted if

the receipt constitutes repayment of debt;

the receipt constitutes remuneration of an employee or an agent (salary based on profit does not per se constitutes the share of profits);

The receipt constitutes an annuity to a survivor of a partner on account of a partner’s share of the profits or to a person who has sold the goodwill of the business

Question 5

Is the intention to bear/share losses a prima facie evidence of a partnership

Answer 5

No. but it can be a proof of an intention to form a partnership

Question 6

2 circumstances that will not create a partnership

Answer 6

jointly owning a property

sharing of gross returns

Question 7

Discuss the partner’s authority to bind the firm

Answer 7

partners are regarded as agents of the firm. Their action is thus subject to agent law.

An agent can bind a firm if the agent has apparent or actual authority if he performed in a manner that showed an intention to bind the firm.

Question 8

Examples of the action that will imply ostensible/apparent authority

Answer 8

Buy and sell firm goods;

Receive debt payments due to the firm;

Hire employees; and

Employ a solicitor to act for the firm.

Question 9

Define and discuss incoming partner and their liability.

How may a partnership admit or expel a partner?

Answer 9

An incoming partner is a partner-to-be that is not the founding partner.

they will bear no liability to the partnership’s creditor for anything done before they become a partner.

A new partner will be added only with the unanimous consent of all partners.

partner does not have the power to expel another partner unless it is provided in the partnership agreement(or another contractual pact).

Question 10

Define and discuss outgoing partner and their liability

What kind of agreement may release outgoing partner liability

Answer 10

If a partner leaves and the departure does not end the firm, then the partner becomes an outgoing partner. He will still be liable for any debts or obligations incurred before the partner leave.

Liability may end prematurely if the firm agrees to execute a release or a hold harmless agreement, under which the firm agrees to indemnify the retiring partner for liabilities.

Liability to a third party from the firm will need a separate agreement, called a novation.

Question 11

How can an outgoing partner discharge all his liability for future debts of the firm?

Answer 11

A retiring partner needs to give notice of their retirement. Actual notice should be given to existing creditors and notice by way of an advertisement in the London Gazette.

Question 12

Explain holding out and giving credit

Answer 12

If a person holds themselves out as a partner of a firm even though the person is not actually a partner, they may be still held liable.

The benefits bestowed to the partnership on the strength of the pretentious authority to bind (given credit) can cover a wide range of gains apart from money lent. Outgoing partners who have failed to give the correct notice will be liable for the debt personally incurred after retirement.

Question 13

Rules on tangible property belonging to the individual member in a partnership

Answer 13

Property belonging to a partner individually will remain that partner’s property after the dissolution of the firm

Property given by a partner to the firm becomes partnership property and constitutes a capital contribution to the firm by the partner

Unless a contrary intention appears, property bought with money belonging to the firm is partnership property and property tilted in the firm name is partnership property.

Question 14

If a creditor seeks execution on the partnership property in order to settle part of a partner’s debt?

Answer 14

Creditors of an individual partner (as opposed to creditors of the firm) have no right to seek execution on partnership property to satisfy the separate debt of the partner.

a creditor may ask a court to make an order charging the partner’s interest in the firm. If such an order is granted, the creditor will have the right to receive whatever distributions are due the partner, but the creditor does not become a partner

Question 15

Default profit share setting as provided in the Partnership Act 1890

Answer 15

In the absence of any provision in the partnership agreement to the contrary, capital and profits are shared equally among the partners. So if partners contribute unequal shares at the outset of the partnership and want to share in any profits pro-rata to their capital contributions. This would need to be specified in the partnership agreement.

Question 16

Is the partner right to a share of the profits is assignable?

Answer 16

A partner’s right to a share of the profits is assignable, but the assignment does not entitle the assignee to participate in/interfere with the management of the firm. Neither does it make the assignee liable for the firm’s obligations. The only way an assignee can become a partner and gain these rights is with the approval of other partners (unless a contrary clause in the partnership agreement)

Question 17

Default legal position on sharing losses in a partnership

Answer 17

If profits are shared unequally by virtue of a provision in the partnership agreement, on dissolution, any remaining losses will be paid by the partners in the proportion in which they were entitled to share profits.

Question 18

Rule from Partnership Act 1890 on interest incurred by capital contribution and loan made to the partnership

Answer 18

A partner is not entitled to interest on their capital contribution., but is entitled to interest on any loan made to the partnership at a rate of 5% per annum

Question 19

Define sleeping partner

Answer 19

a sleeping partner is merely an investor and takes no active part in the day-to-day running of the business

Question 20

Rules on indemnity for a partnership

Answer 20

Under the terms of the partnership act, the partnership must indemnity partners for any payments made or liability incurred whilst acting in the course of the business of the partnership, or for anything done for the preservation of the business or property of the partnership

Question 21

Default management rule on the partnership

Answer 21

the basic rule is one partner, one vote. Most decisions require a simple majority. a unanimous vote is required for:

Admission of a new partner or an expulsion of an existing partner;

A change in the nature of the partnership business; and

An alteration to the partnership agreement.

Question 22

Nature of relationship between partners

Answer 22

Under common law, partners in a partnership are under a fiduciary duty to each other.

They must act in good faith and exercise their power for the benefit of the partnership as a whole.

Question 23

Partner’s duty to disclose information and account for secret profits

Answer 23

Every partner must account for the profit or benefit obtained,

without the consent of the partners from any transaction concerning the partnership;

or from any use by the partner of the partnership property or that partnership name

Question 24

Competition rule about a partnership

Answer 24

If a partner, without the consent of the other partners, carries on any business in competition with that of the partnership, they must account to the partnership for all profits they made in the business.

Question 25

Tenure of a general partnership

Answer 25

A general partnership cannot exist perpetually. Technically it there is a change in the partners, this effectively brings the partnership to an end. (no perpetual succession)

Question 26

Ways of dissolution without the involvement of the court

By specific enterprise and expiration

Answer 26

If the partnership agreement provides the partnership will be for a certain term, it is dissolved upon the expiry of the term. of if the partnership is set up for a specific purpose, it is dissolved once the aim is fulfilled or terminated

If a premium is paid for the formation of the partnership in this way, and the partnership is terminated early other than for death, a court may order repayment of the premium.

Question 27

Way of dissolution without the involvement of the court

By notice

By bankruptcy, death, or charge

Answer 27

if the partnership was not set up for a fixed term. Any partner can give notice to the other partners to dissolve the partnership

A partnership is dissolved by the death or bankruptcy of any partner. If a partner charges their share of partnership property for a personal debt, the partnership may be dissolved by the other partners at their option.

All these default rules can be overridden by a partnership agreement stating otherwise.

Question 28

Way of dissolution without the involvement of the court

By illegality

Answer 28

A partnership will be dissolved if an event occurs which makes it unlawful. A partnership cannot prevent this eventuality.

Question 29

In what way a court may order the dissolution of a partnership

Answer 29

If a partner becomes permanently unable to perform a partner’s duties, other partners may apply for dissolution;

If a partner has been guilty of conduct that would prejudicially affect the carrying on of the business;

IF there is a wilful or persistent breach of the partnership agreement;

If the business can only be carried on only at a loss;

if the court sees it just and equitable for the partnership to be dissolved

Question 30

Effect of dissolution on

partner authority; and
the distribution of partnership property

Answer 30

The authority of each partner to bind the firm and the other rights and obligations of the partners will continue to wind up the partnership

The order of distribution:
debts to creditors
advances from partners
partner's contributions
divided amongst partners based as per profit-sharing clause in the partnership agreement

Question 31

Discuss the order of repayment for liabilities at the dissolution of a partnership

Answer 31

The order the repayment:
out of profits
out of capital
personal liability

Question 32

Required information for an LLP incorporation

Answer 32

The name (must end in LLP or Limited Liability Partnership)

Details of the LLP’s registered office location and address

Names and address of the members of the LLP (at least 2 designated members)

Details of people with significant control

Question 33

Importance of having a certain amount of members in a LLP

Answer 33

An LLP must have at least 2 members. if without for more than 6 months the person will be jointly and severally liable with the LLP for the debts.

Question 34

The role of a designated member in an LLP

Answer 34

administrative duties including:

Appointing/removing auditors
Submission of annual confirmation statements
Signing and filing accounts; and
compliance with statutory filing requirements

= COMPANY SEC

if no member has been designated, the court will treat all the members as designated members.

Question 35

Time limitation of notification to the Registrar of Companies of changes in membership or the designated person

Answer 35

within 14 days

Question 36

Retirement from membership in an LLP

Answer 36

A person may cease to be a member of an LLP by giving reasonable notice to the other members and giving notice to Registrar at Companies house within 14 days

Question 37

Discuss people with significant control (PSCs)

Answer 37

a PSC must be one of the following:

Dly or inDly holds rights over >25% of the surplus assets on a winding-up;

Dly or inDly holds >25% of the rights to vote;

Dly or inDly holds the right to appoint or remove the majority of those entitled to take part in management;

Otherwise has the right to exercise, or actually exercises, significant influence or control over a trust.

A PSC does not have to a natural person (can be a company)

Question 38

Discuss limited liability of an LLP

Answer 38

The only liability of a member of an LLP is their capital contribution. On a winding up, a member of an LLP is their capital contribution to the assets of the LLP only as provided for in the LLP agreement.

Members of an LLP are subject to the rules regarding wrongful and fraudulent trading contained in the Insolvency Act 1986. Individual who acted wrongfully or fraudulently to be held personally liable for the debts of the company/LLP in the event of insolvency.

Clawback provisions also apply (return of assets made within 2 years)

Question 39

Taxation implications for an LLP

Answer 39

members of an LLP are taxed individually for income tax. CGT and death duty on a personal basis.

Question 40

Stamp duty exception for an LLP

Answer 40

no stamp duty is owed if the property is transferred to the LLP within 1 year of the LLP’s incorporation if:

Transferred by a person who is/was a partner in an LLP or hold the property as a bare trustee for a partner in such a partnership; and

The proportional ownership of the property in the LLP remains the same as the proportional ownership of the property in the partnership