Business (Partnerships)

Question 1

What are the requirements to be a Partnership?

Answer 1

• Relationship between persons
• Carrying out a business
• In common with a view to profit
• At least two persons.

Question 2

What guidance does the Partnership Act give on determining the existence of a partnership?

Answer 2

• No intention or form necessary
• Need evidence of profit sharing and that all individuals part of decision making

Question 3

What three duties do partners have to eachother?

Answer 3

• Be honest and provide full disclosure to one another.
• Not make any unauthorised personal profit that is not accounted for to the firm
• Ensure no conflict of interest or duty

Question 4

What is the rule about conflict of duty and interest?

Answer 4

If a partner carries on business of the same nature without consent of the others, they must account to the firm for all profits made in their business.

Question 5

What is the contractual liability of partners?

Answer 5

Partners are personally liable for debts and obligations incurred during their time in the partnership.

Every partner is liable jointly for all debts & obligations incurred whilst they are partner in contract

Jointly liable = All defendants are equally responsible for the damage irrespective of how much they personally caused

Question 6

What is the tortious liability of partners?

Answer 6

Partners are jointly and severally liable for torts committed in the course of partnership business.

J&S = Responsibility shifts based on the degree of each defendant’s responsibility

Question 7

If a partnership becomes insolvent, who is liable?

Answer 7

If a partnership becomes insolvent, each partner is jointly and severally liable for all the debts of the partnership

Question 8

Are new partners liable for previous debts?

Answer 8

No, new partners are not automatically liable for debts incurred before they joined.

Question 9

What happens to the liability of retired partners?

Answer 9

Retired partners are still liable for debts incurred during their time unless creditors agree otherwise.

Question 10

What are the rules about holding out?

Answer 10

A non-partner can be held liable if they allow themselves to be held out as a partner.

Question 11

When is a partnership bound by a contract entered into by a partner?

s.5 PA 1980

Answer 11

A partnership is bound if the person contracring has actual authority (authorised)
…

A partnership is also bound if there is Apparent Authoirty - if the partners act is…

1. For carrying out business of the kind carried out by the firm; and
2. The act is for carrying it out in the usual way

A partner won’t be bound if ….

1. 3rd party knew that the partner was not authorised; or
2. The 3rd party did not know or believe the partner was a partner

Question 12

When is a partnership bond by a contract entered into by a non-partner?

Common Law of Agency

Answer 12

An agent with no actual authority may bind the firm if he has apparent authority…

If the representation is that a person is a partner when they are not, the firm holds out the person as a partner.

Is there holding out?

Question 13

Do the partners pay tax individually?

Answer 13

The partners individually are liable to pay both income tax and capital gains tax

Question 14

What is the income tax liability of individual partners?

Answer 14

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

A partner is not liable for the tax on other partners shares of profit

Question 15

How does capital gains tax apply to partnerships?

Answer 15

Each partner is treated as owning a fractional share of assets and is liable for CGT on the disposal of their share.

A fractional share is based on the** agreed profit sharing ratio**

Question 16

Does the partnership itself pay any tax? Does it have to deal with HMRC?

Answer 16

The partnership (as opposed to the individual partners) does not pay tax

However, the partnership has to make a single tax return to HMRC of profits.

Question 17

What are the rules regarding partnership property?

Answer 17

All property brought into the partnership is partnership property and each partner has a share in it.

Partnership Agreement should contain provision as to which assets are partnership property and those that are personal

Question 18

How are profits and losses shared among partners?

Answer 18

Unless agreed otherwise in the Partnership Agreement, all partners share equally in profits and losses.

An agreement can set out a Profit Sharing Ratio

Question 19

What are the rules on partner salaries?

Answer 19

• Without an agreement, partners are not entitled to salaries per s.24(6) PA. They are allowed to draw from income profits, each with an equal entitlement.
• If they wish to have a salary, an agreement should set out how much each partner may draw in a given period.
• The agreement can also alter the entitlement to drawings, and set a limit.

Question 20

What is required for decision making in a partnership?

Answer 20

Decisions are decided by majority

However, unanimity is needed for:

1. Changes to the nature of the partnership business
2. Introducing a new partner
3. Varying rights or duties of partners.

Agreements often set out reserved matters requiring unanimity.

Question 21

What is required to introduce a new partner?

Answer 21

Unanimity

Question 22

What are the rules on expelling a partner?

Answer 22

Unanimity is required to expel a partner unless an agreement provides otherwise.

Question 23

What happens when a partner leaves?

Answer 23

Without an agreement, the partnership is automatically dissolved when a partner leaves.

An agreement can state that the partnership continues between remaining partners by ensuring that there is no technical dissolution

Question 24

What is a Limited Liability Partnership (LLP)?

Answer 24

An LLP is a body corporate with separate legal entity status, offering limited liability while retaining the tax transparency of a partnership.

Question 25

What are the requirements for forming an LLP?

Answer 25

At least two persons carrying out a lawful business with a view to profit, and registration with Companies House (Form LL1N01).

Question 26

What is the Continuing Registration Regime?

Answer 26

Once registered, LLPs have to keep filing info such as…

• change of name
• changes in membership
• creation of charges
• annual confirmation statements,
• accounts

… to Companies House

Also have to keep in-house records including register of members and of people with significant control.

Question 27

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

Answer 27

• Death
• Agreement
• Giving notice
• LLP dissolution

Question 28

How are profits and capital shared in an LLP?

Answer 28

Profits & Capital are shared equally among members unless otherwise agreed.

Question 29

If the LLP doesn’t have an agreement, what default provisions apply?

Answer 29

LLPA 2000
Regulation 7(1)-(11)

Question 30

What are the default provisions for management in an LLP?

Answer 30

Each member may take part in management, and decisions are made by majority unless the nature of the business is changed, which requires unanimity.

Question 32

What happens when a member leaves an LLP?

Answer 32

If one person decides to leave the partnership, the LLP will continue

If there are fewer than two members, the sole member can continue the LLP for 6 months, before theyt become jointly and severally liable for debts incurred after the six-month period.

Question 33

What is the tax treatment of LLPs?

Answer 33

Members are taxed individually on their share of profits, and the LLP itself does not pay income or capital gains tax.

However, LLPA gives relief from stamp duty where assets of the partnership business are transferred to the LLP.

The LLP may register for VAT not the members.