Business Law - Unit 2 - Partnerships Flashcards
What is a partnership?
When 2 or more persons are ‘carrying on business in common with a view of profit’ - s1 PA 1890.
Does a general partnership have a separate legal personality from the partners?
No, it doesn’t have a separate legal personality from that of the partners.
What are 3 factors that help to determine whether 2 or more people are carrying on a business in common?
1) Do the individuals all take part in decision-making?
2) Whose names are on the title deeds of any property?
3) How are profits shared?
All circumstances and facts need to be taken into account when looking into this.
What should partnerships have?
They should have an agreement - this can either be the default one which exists in the PA 1890 or a bespoke one made.
Doesn’t have to be written but is better to be written just in case there’s any disagreements.
Agreements can also be implied by conduct - i.e. where a partner has acted in a certain way over a period of time and the other partners haven’t objected.
What are some sections of the PA 1890 that can’t be overriden?
ss1 and 2 - which govern when a partnership comes into existence and
ss5-18 - covers the relationship between partners and third parties (incl. liability for debts)
What things does the partnership agreement need to include?
1) Name - even if this is just the name of the partners. Should insert the name and any trading name into the partnership agreement.
2) Place and nature of business - Can set out the partnership’s place of business, area of geographical location and nature of business.
3) Commencement and duration - Partnership begins when definition is satisfied, not when partners say it begins. However, useful to enter a date to see when the parties BELIEVE that their particular rights, responsibilities and obligations commence.
Some partnerships are fixed term so adding this will show when the partners expect the partnership to end.
If partners carry on in business after the expiry of the fixed term and don’t enter into a new agreement, they are presumed to be partners on the same terms as before.
3) Work input - Partners MAY take part in the management of the business but don’t have to do so.
PA should set out each partner’s working hours so it is clear what the expectation is. Should also set out holiday entitlement, sickness, maternity/paternity provisions - not covered by PA 1890.
4) Roles - should set out the scope of duties and responsibilities each partner is expected to carry out.
If the parties wish to include the right to expel one of the other partners on the basis of breach of the PA, they should set out the details of their role clearly.
What are the 3 things that are the exception to the rule that all decisions in a partnership must be taken by majority?
1) Changing the nature of the business
2) Introducing a new partner
3) Changing the terms of the partnership agreement
All of these 3 can only be made unanimously.
What things does the partnership agreement need to include? - Card 2
5) Financial input - The agreement should set out the amount that the partners initially contributed and whether they’ll be obligated to contribute more capital in the future.
6) Shares in income, capital profits & losses - Under the PA 1890, the partners share equally in the capital and profits of the business. The former refers to being entitled to an equal share of the partnership capital on dissolution of the partnership. The latter refers to both capital profits (one off profits) and income profits (recurring in nature).
However, can vary this. Might want to own the partnership capital in the same proportion that they put capital in. Could state that they need interest to be paid on initial capital contributions to encourage investment. Also could vary the proportions in which income profits are to be shared (which, in practice, will often depend on their working hours).
6) Drawings and salaries - Partners are not employees. They own the business and the income profits which partners receive are drawings. The PA should set out how much each partner is allowed to draw down in any given period.
Some partners may also receive a salary.
7) Ownership of assets - PA should set out how the assets that the partnership use are owned.
8) Expulsion - Under PA 1890, no majority of partners should expel another partner unless the partners have expressly agreed to this. Usually means that unless PA has been varied, expelling a partner will not be possible because a partner is unlikely to agree to their own expulsion.
Could include an expulsion clause, allowing the partners to expel one of the partners if they’ve conducted themselves in a certain way.
9) Dissolution - Means the original partnership is ending. Even if one partner leaves, that’s technically a dissolution - even if trading continues.
Best to set out under what circumstances a partner can retire or when the partnership will come to an end - may give partners more control than relying on PA 1890 which states any partner may end the partnership at any time by giving notice of their intention to do so to all the other partners (very impractical).
When is a partnership dissolved?
A partnership is dissolved:
- When a partner retires (nothing to do with retiring, just means leaving the partnership)
- On expiry of a fixed term
- By the death or bankruptcy of one of the partners
- If the partners give notice of dissolution to a partner who has (by order of the court) granted a charge over their share of the partnership property, for a debt owed by them alone and not the partnership as a whole.
Also dissolve if something happens which makes it unlawful for the business of the firm to be carried on - e.g. losing a license. - This CAN’T BE DISAPPLIED.
Finally, the partners can also apply to the court for an order that the partnership is dissolved if:
1) A partner becomes permanently incapable of performing their part of the partnership contract.
2) A partner’s conduct is calculated to be prejudicial to the business.
3) A partner willfully or persistently breaches the partnership agreement.
4) The partnership can only be carried on at a loss or
5) The court thinks that, for other reasons, it is just and equitable to order that the partnership be dissolved.
What is goodwill?
A business’s reputation and the value of its clients and contacts.
When a business is sold as a going concern, part of the purchase price will be for the business’s goodwil.
Commonly two years profit is taken as the value for goodwill.
If the partnership’s assets are sold individually to be used elsewhere, goodwill will not factor in.
Better for partners to sell as a going concern as the buyers will also pay for goodwill.
According to s44 PA 1890, how should the proceeds of sale of a partnership be distributed?
Unless parties have decided otherwise by agreement:
- Creditors of the firm should be paid in full. If there is a shortfall, partners must pay the balance from their private assets. Will share the losses as per PA 1890/their own PA agreement.
- Partners who have lent money to the firm should be repaid the amount outstanding on the loan, including interest.
- Then partners should be paid the share of the partner’s capital to which they are entitled.
- Finally, any surplus is shared between the partners in accordance with their PA agreement.
All of the partners, unless they are bankrupt, have the authority to act in winding up the business’s affairs. If any of the partners are bankrupt or deceased, the trustee in bankruptcy or personal representative can also make such an application.
What are restraint of trade clauses and why are they often in partnership agreement?
These include non-compete clauses, non-solicitation clauses and non-dealing clauses.
Only enforceable if it protects a legitimate business interest and is no wider than reasonable to protect that interest in terms of duration, geographical area and scope.
Non-dealing clauses are the most restrictive as they prevent the outgoing partner from entering into contracts with clients, former clients or employees whether as a result of the former partner approaching the employee/client or the other way round.
Why is it useful to include a DR clause in the PA?
Means that partners must use arbitration or another form of ADR to resolve disputes instead of going through the courts.
Means they can resolve any disputes quickly and cheaper than going through the courts.
What are partnership responsibilities under the PA 1890?
Partners owe a duty of the utmost fairness and good faith towards one another.
They also:
- Must be completely open with each other regarding any relevant info regarding the partnership.
- Must account to the firm for any private profits they’ve made without the other partners’ consent from any transaction concerning the partnership and
- Must not compete with the firm - carrying on any business of the same nature as and competing with that of the firm.
Partners must also
- Bear a share of any loss made by the business, in accordance the terms of their partnership agreement.
-Indemnify fellow partners who have borne more than their share of any liability or expense connected with the partnership.
- Other duties may also be included as inserted into a bespoke PA.
When is the firm liable to third parties?
Under contracts - whether made by all the partners together or by just one.
Actual authority - either express or implied actual authority.
Express actual authority - partners may have expressly given one of the partners permission to enter into a particular transaction/type of transaction.
Implied actual authority - Partners may have impliedly accepted that one or more partners have the authority to represent the firm in a particular type of transaction.
Apparent authority - Actions which were not actually authorised but appeared to an outside to be.
