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Business Law > Business Models And Partnership agreements > Flashcards

Business Models And Partnership agreements Flashcards

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1
Q

What are the main learning objectives of this module?

A

Consider the main characteristics of different legal forms of business, analyse key clauses in a partnership agreement, identify duties and responsibilities of partners, understand regulations governing Limited Liability Partnerships, and apply legal research skills to advise clients.

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2
Q

What is the effect of the Partnership Act 1890 on traditional partnerships?

A

The Partnership Act 1890 governs traditional partnerships, affecting their formation and operation.

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3
Q

What is the default position regarding salaries in traditional partnerships?

A

The default position is no entitlement to salary unless provided for in the partnership agreement.

Section 24(6) states that drawings and salaries are treated as an advance on profit share.

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4
Q

What duties do partners owe to each other?

A

Partners owe a duty of good faith, to act honestly towards each other, and for the benefit of the partnership as a whole.

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5
Q

What is the tax liability of partners in partnerships and LLPs?

A

Partners are individually liable to pay their own taxes and have no liability for other partners’ taxes.

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6
Q

What is the difference in dissolution between traditional partnerships and LLPs?

A

In LLPs, there is no automatic dissolution if a partner leaves; the LLP continues.

If it drops to a sole partner, there is a 6-month grace period before personal liability arises.

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7
Q

How is a traditional partnership defined under the Partnership Act 1890?

A

A traditional partnership is defined as a relationship between persons carrying on a business in common with a view to making a profit.

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8
Q

What is required to form a partnership?

A

There must be at least two persons, and no formal intention is required to form a partnership.

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9
Q

What evidence can indicate the existence of a partnership?

A

Evidence of profit sharing is prima facie evidence of a partnership, but not necessarily conclusive.

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10
Q

What is the fiduciary relationship between partners?

A

Partners have an overriding duty of good faith towards each other, similar to that of a trustee to a beneficiary.

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11
Q

What is the nature of partners’ liability for partnership debts?

A

Partners are jointly liable for all debts and obligations incurred while they are partners.

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12
Q

What happens to a new partner’s liability regarding pre-existing debts?

A

A new partner is not automatically liable for debts incurred before they joined the partnership.

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13
Q

Under what circumstances can a non-partner be held liable for partnership debts?

A

A non-partner may be liable if they have held themselves out as a partner.

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14
Q

How does a partnership bind itself to contracts made by partners?

A

A partnership is bound by contracts made by partners if the act is for carrying on the business of the firm.

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15
Q

What is the taxation structure for partnerships?

A

Each partner is liable to tax as an individual on their share of the partnership’s income or gains.

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16
Q

What is tax transparency in partnerships?

A

Tax transparency means that a partnership does not pay tax itself; instead, partners report their share of profits individually.

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17
Q

What must partners agree with HMRC regarding profits?

A

Partners must agree on the distribution of their profits with HMRC.

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18
Q

What do partners submit for tax purposes?

A

Partners submit their own individual tax returns containing all income received from the partnership as well as other income receipts.

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19
Q

What types of income must be reported by partners?

A

Partners must report income from savings, dividends, and rental income.

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20
Q

What taxes are partners liable to pay?

A

Partners are liable to pay both income tax and capital gains tax.

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21
Q

Who is liable for the income tax on partnership profits?

A

Each partner is personally liable for the income tax on their share of the partnership profits.

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22
Q

Are partners jointly liable for each other’s tax on partnership profits?

A

No, a partner is not liable for the tax on other partners’ shares of partnership profits.

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23
Q

What applies to capital gains tax on disposal of a capital asset by a partnership?

A

Normal capital gains tax principles apply on disposal of a capital asset by a partnership.

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24
Q

How is a partner treated during the disposal of a partnership asset?

A

Each partner is treated as making a disposal of their share and will be taxed on this share of any gain.

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25
Q

What determines a partner’s fractional share in an asset?

A

A partner’s fractional share is based upon the agreed profit sharing ratio or equally if no PSR is agreed.

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26
Q

What legal formality is required to form a partnership?

A

A partnership can be formed without any legal formality.

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27
Q

What governs partnerships?

A

Partnerships are governed by the Partnership Act 1890.

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28
Q

Are partnerships separate legal entities?

A

No, partnerships are NOT a separate legal entity to its partners.

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29
Q

What type of liability do partners have in contracts?

A

Partners have joint liability in contract and potentially joint and several liability for partnership debts.

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30
Q

What applies when determining if a firm is bound by a contract?

A

Section 5 of the Partnership Act 190 applies when a contract is purportedly formed by a partner.

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31
Q

What allows for confidentiality in partnerships?

A

Conducting business through a partnership allows for a high degree of confidentiality regarding the business’s affairs.

32
Q

What does it mean for partnerships to be tax transparent?

A

Partnerships are tax transparent: the partners themselves pay income tax and capital gains tax on their share of profits and gains.

33
Q

What does PA 1890 provide?

A

PA 1890 provides the framework for regulating traditional partnerships, serving as ‘fall-back’ provisions in the absence of a partnership agreement.

34
Q

When can partners’ mutual rights and obligations be varied?

A

Partners’ mutual rights and obligations can be varied at any time by their unanimous consent, which can be express or inferred from a course of dealing.

35
Q

What is the default code in PA 1890?

A

The default code in PA 1890 applies to relations between partners in the absence of any contrary agreement, whether written or oral.

36
Q

What are common provisions in partnership agreements?

A

Common provisions include: commencement and duration, partnership name and place of business, partnership property, capital, profits and losses, drawings/salary, accounts, dissolution, duties, powers, and restrictions on partners.

37
Q

What should a partnership agreement specify about commencement?

A

The agreement should specify a commencement date for rights and obligations, and if partners work together before this date, PA 1890’s default provisions apply.

38
Q

What restrictions apply to partnership names?

A

The partnership name must not include terms like ‘limited’ or ‘LLP’, be offensive, or suggest a connection with government without permission.

39
Q

How is partnership property defined?

A

Partnership property is deemed to be owned collectively by partners, and whether an asset is partnership property depends on the partners’ intentions.

40
Q

What does section 20 of PA 1890 state about partnership property?

A

Section 20 states that all property brought into the partnership for its business is considered partnership property.

41
Q

What is the default sharing of profits and losses under PA 1890?

A

The default provisions state that all partners share equally in capital and profits, and contribute equally to losses, unless otherwise agreed.

42
Q

What should the partnership agreement state about drawings/salary?

A

The agreement should specify how much each partner may draw, as the default is equal sharing of income profits without entitlement to salary.

43
Q

What does PA 1890 say about decision making in partnerships?

A

Partnership decisions require a majority vote, except for changes to the nature of the business, introducing a new partner, or varying partners’ rights, which require unanimity.

44
Q

What is required for a new partner to join under PA 1890?

A

Unanimous consent of existing partners is required for a new partner to join the partnership.

45
Q

What does section 25 of PA 1890 state about expulsion of partners?

A

A partner cannot be expelled by majority vote unless all partners have agreed that a majority can do this.

46
Q

What happens if a partner leaves without an agreement?

A

If there is no agreement, the partnership is dissolved when a partner leaves, as ‘partnership’ refers to all partners.

47
Q

What is the purpose of non-compete clauses in partnership agreements?

A

Non-compete clauses prevent partners from competing with the firm, which is implied under section 30 of PA 1890.

48
Q

How can a partnership be dissolved under PA 1890?

A

A partnership can be dissolved automatically upon expiry of a fixed term, completion of a venture, death or bankruptcy of a partner, or by notice from any partner.

49
Q

What is the process for distributing assets upon dissolution?

A

After paying debts and liabilities, remaining assets are distributed to partners based on their original capital, unless an asset surplus ratio is specified.

50
Q

What is an LLP?

A

An LLP is a hybrid vehicle combining aspects of a company and a partnership, offering limited liability to its members.

51
Q

What are the advantages of an LLP?

A

LLPs provide the flexibility of a partnership with limited liability for members, allowing them to contract with third parties.

52
Q

What legislation governs LLPs?

A

LLPs are governed by the Limited Liability Partnerships Act 2000, supplemented by the Limited Liability Partnerships Regulations 2001 and 2009.

53
Q

What is required to form an LLP?

A

Two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP.

54
Q

Where must an LLP be registered?

A

An LLP must be registered at Companies House.

55
Q

What is the Economic Crime and Corporate Transparency Act 2023 (ECCTA)?

A

The ECCTA has resulted in changes to the underlying legislation for Limited Liability Partnerships (LLPs).

56
Q

What is required for the formation of an LLP?

A

Two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP.

57
Q

Who can be a ‘person’ in the context of LLP formation?

A

A ‘person’ can be both a company and an individual.

58
Q

What is the primary requirement for an LLP’s business activity?

A

There must be some commercial activity; LLPs are not typically used by non-profit organizations.

59
Q

What is the process for registering an LLP at Companies House?

A

Subscribing members fill out Form LL IN01 and send it to Companies House with the relevant fee.

60
Q

What information must be included in Form LL IN01?

A

The form must state the name of the LLP, its registered office’s address, the registered email address, and designated members.

61
Q

What does the Registrar of Companies issue upon successful registration of an LLP?

A

A certificate of incorporation as conclusive evidence that all legal requirements have been complied with.

62
Q

What is the requirement for the registered address of an LLP since March 2024?

A

The registered address must be an ‘appropriate registered address’, similar to the requirement for companies.

63
Q

Who cannot be a member of an LLP?

A

A person who is subject to disqualification as a director under the director disqualification legislation.

64
Q

What ongoing obligations do LLPs have to file with Companies House?

A

LLPs must file changes of name, registered office, membership, creation of a charge, annual confirmation statements, and accounts.

65
Q

What in-house records must an LLP maintain?

A

Registers of its members and of its ‘people with significant control’ (PSCs).

66
Q

Who are the members of an LLP?

A

Members are those who subscribed to the incorporation document and those who joined later by agreement.

67
Q

How many members must an LLP have?

A

An LLP must have at least two formally appointed members at all times.

68
Q

What are the obligations of designated members in an LLP?

A

Designated members must sign accounts, make filings at Companies House, and act on behalf of the LLP if it is wound up.

69
Q

When does a member cease to be a member of the LLP?

A

Upon death, agreement with other members, giving notice, or dissolution if the member is a body corporate.

70
Q

What is the LLP Agreement?

A

An LLP Agreement is a private document that sets out the formal procedures and arrangements agreed by the members.

71
Q

Are members of an LLP required to have a formal Members’ Agreement?

A

No, members are not obliged to have a formal Members’ Agreement.

72
Q

What are the default provisions in the absence of an LLP Agreement?

A

Members share equally in capital and profits, indemnification for liabilities, participation in management, and more.

73
Q

How is an LLP taxed?

A

An LLP is treated as a partnership for tax purposes; members are taxed individually on their share of income.

74
Q

What is a significant difference in taxation between an LLP and a company?

A

An LLP is ‘transparent’ for tax purposes, while a company pays corporation tax on its profits.

75
Q

What are the corporate characteristics of an LLP?

A

LLPs have separate legal personality, limited liability, and must file accounts at Companies House.

76
Q

What are the partnership characteristics of an LLP?

A

LLPs have no share capital, no distinction between members and management, and are tax transparent.

77
Q

What is the advantage of an LLP model?

A

It allows for limited liability and tax transparency, making it popular for law and accountancy firms.

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