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Business Law & Practice Flashcards

1
Q

How is a general partnership defined?

A

When two or more persons are carrying on a business in common with a view of profit.

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2
Q

How are general partnerships governed?

A

By the Partnership Act 1890 which provides a default contract to govern the relationship between the partners.

Partners may choose to override the default contract with some specific terms where they can.

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3
Q

What provisions of the Partnership Act cannot be overridden by an agreement?

A

Sections 1 and 2 which govern when partnerships come into existence

Sections 5 to 18 which cover the relationship between the partners and third parties (i.e. liability for debts)

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4
Q

When does a general partnership commence?

A

When the definition under the Partnership Act is satisfied and NOT the date included on the agreement itself.

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5
Q

How long can general partnership agreements last?

A

Either fixed term or indefinitely.

If an agreement is fixed term and the partners carry on in business after expiry, they are presumed to be partners on the same terms as before.

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6
Q

How are decisions made within a general partnership?

A

All decisions in a partnership must be taken by a majority except for three exceptions which must be unanimous:

  • Changing the nature of the business
  • Introducing a new partner
  • Changing the terms of the partnership agreement

A partnership may decide to make more unanimous decisions in certain areas.

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7
Q

What is the default position under the Partnership Act in respect of shares in income and capital losses and profits for a general partnership?

Can this be amended?

A

The partners equally share in the capital, profits and losses of the business.

This may be amended to reflect an alternative agreement e.g. where the partners have contributed different amounts.

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8
Q

What are drawings in the context of a general partnership?

A

The income profits which partners receive from the business.

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9
Q

What is the general position on drawings within a general partnership and can this be amended?

A

The general position is that partners are entitled to share equally, but an agreement will allow them to constitute how much any one partner can ‘draw down’ in any given period.

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10
Q

What is the general position on expulsion within a general partnership and can this be amended?

A

The general position is that no majority of partners may expel another unless the partners have expressly agreed to this.

An agreement should include an expulsion clause which may be linked to something such as poor performance.

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11
Q

What is the general position on dissolution within a general partnership and can this be amended?

A

Under the Partnership Act, a can be dissolved if:

  • When a partner retires (leaves the firm)
  • On expiry of a fixed term
  • Death or bankruptcy of any of the partners
  • They apply to court for an order to dissolve the partnership
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12
Q

If a partner retires / leaves the general partnership, what notice must be given?

A

Any partner may end the partnership at any time by giving notice of its intention to do so to all other partners.

Notice does not have to be for a certain amount of time or written, unless the agreement is a deed.

This can be disapplied by a partnership agreement.

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13
Q

When can the partners apply to the court to dissolve a general partnership?

A
  • If a partner becomes permanently incapable of performing their part of the partnership contract
  • A partner’s conduct is calculated to be prejudicial to the business
  • A partner wilfully or persistently breaches the partnership agreement
  • The partnership can be carried on at a loss
  • The court thinks that, for other reasons, it is just and equitable to order that the partnership is dissolved
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14
Q

What the effect of dissolution of a general partnership in the absence of a partnership agreement?

Can this be amended?

A

The partnership must end
All assets must be sold
The outgoing partner must receive their share
An outgoing partner can insist that the business is sold

This can be amended to include specific provisions e.g. how outgoing partners are paid. The default amount is either 5% interest per annum on the value of their partnership until they receive their share.

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15
Q

How are proceeds of sale distributed following the sale of the general partnership or its assets?

A
  1. Creditors of the firm must be paid in full. The partners must pay any shortfall from their private assets equally.
  2. Partners who have lent the firm must be repaid the amount outstanding on the loan, including interest.
  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 the terms of their partnership agreement.
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16
Q

Which partners have authority to act in winding up the business’ affairs on the dissolution of a general partnership?

A

All partners.

If the partners are deceased or bankrupt, the trustee or personal representative can also make such an application.

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17
Q

What is a restraint of trade?

Do the partners of a general partnership have a restraint of trade under the Partnership Act?

A

A clause which seeks to restrict an outgoing partner in their business dealings once they have left the partnership.

There is no implied restraint of trade clause within the default provisions, but this can be amended to protect confidential information or restrict a former partner from competing with the partnership agreement.

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18
Q

What are partners’ responsibilities under the Partnership Act in respect of a general partnership?

A
  • Partners must be completely open with one another regarding any relevant information regarding the partnership
  • Partners must account to the firm for any private profits they have earned without the other partners’ consent
  • Partners must not compete with the firm
  • Partners must bear a share of any loss made by the business in accordance with the terms of their agreement
  • Partners must indemnify fellow partners who have borne more than their share of any liability or expense connected with the partnership
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19
Q

When is a general partnership liable to third parties?

A

By contract (by all partners acting together or one partner alone)

Actions under authorised authority

Actions under apparent authority

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20
Q

What is authorised authority in respect of a general partnership?

A

Where the partners may have acted jointly in making a contract

Express authority was given for permission or instructions for one of the partners to enter into a particular transaction

Implied authority when the partners agree that one or more partners have authority to represent the firm in a particular type of transaction.

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21
Q

What is apparent authority in respect of a general partnership?

A

Where the firm may be liable for actions which were not actually authorised but may have appeared to have been authorised by an outsider.

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22
Q

When will a general partnership be liable to third parties under apparent authority?

A

When the transaction is one which relates to business of the kind carried on by the firm

The transaction is one for which the partner in such a firm would usually be expected to have authority to act

The other party to the transaction did not know that the partner did not have authority to act

The other party deals with a person whom they know or believe to be a partner

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23
Q

Before leaving/retiring from a general partnership, how are partners liable for the partnership’s debts?

A

A claimant can sue any or all of the partners, and collect total damages awarded by a court from any or all of them, leaving the defendant(s) to seek contribution from any of the other partners.

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24
Q

What are the consequences for the general partnership if a partner has acted negligently?

A

The firm itself can be liable for a partner who acts in the ordinary course of the firm’s business or with the authority of their partners.

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25
Q

What is a novation agreement?

A

An agreement to replace or substitute a party.

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26
Q

What happens to an outgoing partner’s liability under a novation agreement for a general partnership?

A

The creditor will enter into a contract with a retiring partner, any new partner and the other partners.

They will release the original partners from liability and the newly constituted partner will take over liability.

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27
Q

What is a partner’s liability after they leave a general partnership?

A

They remain liable for any debts during their time as a partner in the absence of a novation agreement.

After they have left, they are no longer liable provided they comply with section 36 of the Partnership Act.

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28
Q

What are the requirements under section 36 of the Partnership Act?

A

The partner must notify anyone the firm has dealt with before by way of a direct notice.

The partner must also notify ‘the world’ by putting a notice in the London, Edinburgh or Belfast Gazette.

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29
Q

What happens to a partner’s liability after leaving the general partnership if they are bankrupt or dead?

A

The estate and bankrupt partner will not be liable for any debts.

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30
Q

Who can a claimant sue in a general partnership order to enforce a liability?

A

The partner with whom they made contact (privity of contract)

Anyone who was a partner at the time the debt was incurred

The firm in the firm’s name.

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31
Q

What steps can an insolvent general partnership take?

A

They can be wound up as an unregistered company

They can make a voluntary arrangement with creditors

They can make an administration order of the court

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32
Q

What tax do partners need to pay in a general partnership?

A

VAT

National Insurance

Income Tax or Corporation Tax

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33
Q

What happens if a partner in a general partnership cannot pay a debt owed to a third party?

A

The third party can obtain a charge over the partner’s property and apply for sale to cover the outstanding debt.

They can also seize assets belonging to that partner.

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34
Q

How many members must an LLP have upon formation?

A

At least two members where two must be designated members to file documents at Companies House.

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35
Q

How is an LLP incorporated?

A

LL IN01 form along with the applicable fee, which is similar to the standard IN01.

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36
Q

What are the responsibilities of the designated members of an LLP?

A

Signing and filing the annual accounts with the Registrar

Appointing, removing and remunerating the auditors

Filing the annual confirmation statement

Sending notices to the Registrar of Companies, for example concerning a member leaving or joining the LLP

Winding up the LLP

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37
Q

What happens if an LLP becomes insolvent?

A

The company liquidation regime under the Insolvency Act applies to the members and LLP.

Members may be required to contribute to the assets of the LLP if there has been misfeasance, fraudulent trading or wrongful trading.

38
Q

What are the duties and responsibilities of the members within an LLP?

A

Any duties contained within the agreement between its members and the LLP

Any regulations under the LLP Regulations which have not been agreed separately

A duty of good faith

A duty to account for any money received on behalf of the LLP

A duty to other members to render true accounts and full information on the LLP

39
Q

Can LLP’s be liable to third parties due to the actions of a member?

A

Yes, the principles of authorised authority and apparent authority apply to an LLP.

40
Q

Can a LLP own property?

A

Yes

41
Q

Can an LLP grant charges?

A

Yes, they can grant both fixed and floating charges

They must keep a register of charges at its registered office.

42
Q

What must an LLP do when there is a new member?

A

They must deliver a notice to the Registrar of Companies notifying them of the new member within 14 days of appointment.

43
Q

How are profits shared in an LLP?

A

The default position is that all members of the LLP can share equally in the capital and profits.

Members can amend this by entering into a membership agreement.

44
Q

What is the management and decision-making handled in an LLP?

A

The default position is that every member can take part in the management of the LLP and that members are not entitled to remuneration to take part.

Members can amend this by entering into a membership agreement.

45
Q

How can a member leave an LLP?

A

The general position is that member must give reasonable notice to the other members. They cannot be expelled.

Members can amend this by entering into a membership agreement.

They must notify Companies House within 14 days of the member leaving.

46
Q

What types of profit can a business make?

A

Income profits which are recurring in nature e.g. rent or trading income

Capital profits which are one-off items e.g. the sale of an office building

47
Q

What is the calculation for trading profits or losses?

A

Chargeable results - deductible expenditure - capital allowances = trading profit/loss

48
Q

What are chargeable receipts?

A

Money received for the sale of goods and services which must derive from the business’s trade and be an income profit.

49
Q

What is deductible expediture?

A

Income which is recurring and incurred wholly and exclusively for the trade.

Includes salaries, utilities, stock etc.

50
Q

What is a capital allowance?

A

Relief for business on the purchase of plant and machinery to allow them to invest in their businesses.

Includes write down allowance and annual investment allowance.

51
Q

What is ‘pooling’ in the context of plant and machinery?

A

All the cost of the plant and machinery is pooled and the write down allowance is calculated on the overall amount rather than each individual amount of plant or machinery.

52
Q

What is annual investment allowance?

A

A relief which allows businesses to deduct the whole cost of the plant and machinery bought in that particular accounting period.

For companies this amount is uncapped for new assets

For companies and unincorporated companies this is capped at £1 million for new, second-hand and refurbished assets

53
Q

What tax reliefs are available for unincorporated businesses trading at a loss? (6)

A

Start-up loss relief
Carry across and one year back relief
Set-off against Capital Gains Tax
Carry-forward relief
Carry-back of terminal trading loss
Carry-forward relief on incorporation of business

54
Q

When is start-up loss relief available and how is it calculated?

A

It is available when a taxpayer suffers a loss in any of the first four years of the new business.

It is calculated by setting the loss against the taxpayer’s total income in the three years immediately prior to the tax year of the loss.

55
Q

What are the four options for tax relief for businesses trading at a loss?

A

Set against total income from the same tax year

Set against total income from the tax year preceding the tax year of the loss

Set against the total tax income from the same tax year until that income is reduced to zero with the balance with the balance of the loss being set against total income from the tax year preceding the tax year of the loss.

Set against total income from the tax year preceding the year of the loss until that income is reduced to zero, with the balance of the loss being set against total income from the year of the loss.

56
Q

Can a taxpayer set off any losses against capital gains?

A

Only within the same year of the loss.

This applies with carry-across loss when not all the loss has been absorbed.

57
Q

What is carry-forward relief?

A

A taxpayer may carry forward their trading loss for a tax year and set it against subsequent profits which the trade produces in subsequent years, taking earlier years first.

58
Q

What is carry-forward relief on incorporation of business

A

A taxpayer can incorporate their company wholly or mainly for shares which means any trading losses which have not been relieved can be carried forward and set against any income they receive from the company.

59
Q

What is carry-back of terminal trading loss?

A

Any loss incurred in the last 12 months of trading can be carried across and set against trading profits in the final tax year and then carried back and set against trading profit in the three years preceding the year of the loss.

60
Q

What are the caps on relief?

A

The greater of £50,000 or 25% of the taxpayer’s income in the tax year relating to the relief claim.

61
Q

What are examples of VAT exempt supplies?

A

Supplies of residential land
Postal services
Education
Health services

62
Q

What are the requirements to be a registered ‘taxable person’?

A

A person must be registered if the value of their taxable supplies in the preceding 12 months exceeded £90,000.

63
Q

Can zero-rated supplies and exempt supplies reclaim their VAT from HMRC?

A

Zero-rated can.

Exempt supplies cannot as they cannot register with HMRC to reclaim them.

64
Q

Who pays income tax?

A

Individuals
Sole traders
Partners
Personal representatives
Trustees

65
Q

When will an individual have to pay income tax?

A

When employed, they will pay income tax if their earnings exceed a certain threshold

66
Q

What does a sole trader pay income tax on?

A

Based on an assessment of their trading profits.

67
Q

What will partners pay income tax on?

A

Partners are responsible for the tax due on their partnership profits which is based on trading profits.

This should be apportioned between the partners in accordance with the shares in the partnership.

68
Q

What will a personal representative pay income tax on?

A

The deceased’s outstanding income tax and income tax chargeable during the administration of the estate

69
Q

What will a trustee pay income tax on?

A

The income produced by the trust.

70
Q

When does the UK tax year run?

A

6 April until 5 April of the following year

71
Q

What are the three types of income?

A

Non-savings, non-divident income

Savings income

Dividend income

72
Q

What are the steps to calculate income tax?

A
  1. Calculate the total income
  2. Deduct any allowable reliefs
    = Net Income
  3. Deduct personal allowances
    = Taxable income
  4. Separate non-savings and non-dividend income and calculate tax on each type of income at the applicable rate.
  5. Add together the amounts of tax from Step 4 to give the Income Tax Liability.
73
Q

What are sources of income which contribute to a Total Income?

A

Employment and pension income (gross figure)

Savings and investment income (gross figure)

Property income

Trading income (sole trader profits)

74
Q

What is the calculation for net income?

A

Total income - allowable reliefs = net income

75
Q

How are interest payments included when calculating net income?

A

Interest payments on qualifying loans are eligible for tax relief.

76
Q

What is a ‘qualifying loan’ for the purpose of calculating net income?

A

A loan to buy a share in a partnership or to contribute capital or make a loan to a partnership

A loan to invest in a close trading company

A loan to personal representatives to pay inheritance tax

77
Q

What is the personal allowance for income tax (2024/25)?

A

£12,570

78
Q

What order is the personal allowance applied to income for the purposes of calculating income tax?

A
  1. Against non-savings and non-dividend income
  2. Any surplus = savings income
  3. Any surplus = dividend income
79
Q

What happens to the personal allowance when a taxpayer’s income exceeds £100,000?

A

They lose £1 for every £2 of their personal allowance above the £100,000 limit

80
Q

How do you calculate the adjustment to the personal allowance when a taxpayer earns over £100,000?

A

£12,570 - (net income - £100,000)
______________________________
2

81
Q

What is marriage allowance?

A

A spouse can transfer £1,260 of their personal allowance to their spouse or civil partner if they do not have enough income to utilise their personal allowance.

This does not apply if the spouse is a higher or additional rate taxpayer.

82
Q

What is blind person’s allowance?

A

Any taxpayer that is registered blind receives an allowance of £3,070 which is subtracted from the net income just like the personal allowance.

83
Q

What allowances are there for property and trading income?

A

If the gross property income or gross trading income is below £1,000 the income will not be subject to income tax.

If it is above £1,000, the taxpayer can choose to take the £1,000 allowance as a deduction against gross income instead of deducting actual expenses to arrive at their taxable income figure.

84
Q

What is the personal saving allowance?

A

An allowance that can be set against income earned from savings.

85
Q

What are the rates for the personal saving allowance?

A

£0 - 37,000 = £1,000 tax free
£37,701 - £125,140 = £500 tax free
Above £125,140 = no allowance

86
Q

What is the dividend allowance?

A

All taxpayers get a £500 allowance on any income received from dividends.

87
Q

What is the order of taxation to determine the overall tax liability?

A
  1. Non-savings and non-dividend income
  2. Savings income
  3. Dividends income
88
Q

What % applies to non-savings and non-dividend income?

A

£0 - £37,700 = Basic rate at 20%
£37,701 - £125,140 = Higher rate at 40%
Over £125,140 = Additional rate at 45%

89
Q

What % applies to savings income that is not eligible for the personal savings allowance?

A

£0 - £5,000 = rate at 0%
£5,001 - £37,700 = basic rate at 20%
£37,701 - £125,140 = higher rate at 40%
Over £125,140 = additional rate of 45%

90
Q

What % applies to dividend income?

A

£0 - 37,700 = Dividend ordinary rate of 8.75%
£37,701 -

TO COMPLETE

91
Q

What are the consequences for a client if they are in breach of the general anti-avoidance rule?

A

HMRC may request the taxpayer to make just and reasonable adjustments to the amount of tax paid

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