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

If a member of an LLP provides a personal guarantee to the lender for a business loan, is she personally liable?

Answer 2

Yes because a personal guarantee is a legal commitment by an individual to repay a debt if the primary obligor (the LLP in this case) defaults.

By providing the personal guarantee, the member accepts personal liability for the loan repayment.

Think of this as an exception to limited liability of LLPs

Question 3

If a partner departs, does a client who did not deal with that partner need actual notice of the depature?

Answer 3

No.

If a former partner’s departure is published in the London Gazette, this provides constructive notice to third parties who have not had direct dealings with the former partner.

Question 4

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

Answer 4

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

Question 5

What three duties do partners have to eachother?

Answer 5

• 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 6

What is the rule about conflict of duty and interest?

Answer 6

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 7

What is the contractual liability of partners?

Answer 7

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 8

What is the tortious liability of partners?

Answer 8

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 9

If a partnership becomes insolvent, who is liable?

Answer 9

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

Question 10

Are new partners liable for previous debts?

Answer 10

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

Question 11

What happens to the liability of retired partners?

Answer 11

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

Question 12

What are the rules about holding out?

Answer 12

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

Question 13

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

s.5 PA 1980

Answer 13

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 14

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

Common Law of Agency

Answer 14

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 15

Do the partners pay tax individually?

Answer 15

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

Question 16

What is the income tax liability of individual partners?

Answer 16

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 17

How does capital gains tax apply to partnerships?

Answer 17

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 18

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

Answer 18

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 19

What are the rules regarding partnership property?

Answer 19

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 20

How are profits and losses shared among partners?

Answer 20

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 21

What are the rules on partner salaries?

Answer 21

• 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 22

What is required for decision making in a partnership?

Answer 22

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 23

What is required to introduce a new partner?

Answer 23

Unanimity

Question 24

What are the rules on expelling a partner?

Answer 24

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

Question 25

What happens when a partner leaves?

Answer 25

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 26

What is a Limited Liability Partnership (LLP)?

Answer 26

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

Question 27

What are the requirements for forming an LLP?

Answer 27

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

Question 28

What is the Continuing Registration Regime?

Answer 28

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 29

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

Answer 29

• Death
• Agreement
• Giving notice
• LLP dissolution

Question 30

How are profits and capital shared in an LLP?

Answer 30

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

Question 31

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

Answer 31

LLPA 2000
Regulation 7(1)-(11)

Question 32

What are the default provisions for management in an LLP?

Answer 32

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 34

What happens when a member leaves an LLP?

Answer 34

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 35

What is the tax treatment of LLPs?

Answer 35

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.

Question 36

Is a new partner automatically liable for debts incurred before their admission to the partnership?

Answer 36

No, a new partner is not automatically liable for debts incurred before their admission to the partnership.”

A new partner’s liability extends only to debts and obligations incurred after they become a partner.

Question 37

Can someone bring a claim under s.7 HRA for violation of convention rights if they anticipate harm to be caused?

Answer 37

No, because you cannot ba victim of an unlawful act if no harm has yet occurred to her.

Anticipation of harm does not constitute harm.

Question 38

Under what name should a claim against a partnership be brought on the claim form?

Answer 38

Claims against a partnership should be brought against the name under which the partnership carried on business at the time the cause of action accrued

However, don’t forget that suing in the name of the partnership is shorthand for the individual partners

Question 39

If you sue a partnership in relation to acts of partners who have now left, how should the claim be brought against the partnership?

Answer 39

The claim should be brought against the name of the partnership and
the individual partners should be named to avoid any arguments at the enforcement
stage

This ensures that both the partnership assets and the personal assets of the
partners can be targeted for enforcement if necessary.

Question 40

Where partners have contributed capital unequally, in what proportion can they withdraw capital (e.g. if one leaves the partnership)?

Answer 40

Where partners have contributed capital unequally, there is an implied agreement that they are entitled to withdraw capital unequally.

This is not affected by an equal entitlement to partnership profits.

For example if partner 1 contributed £10,000; they can withdraw £10,000 originall contributed unless agreement specifies otherwise.

Question 41

If partners share profits unequally because of an express or implied agreement, how are losses shared>

Answer 41

Losses should also be shared unequally unless there is an agreement to the contrary.

Question 42

In what order should interst on capital be paid in relation to paying profits?

Answer 42

The interest on capital should be paid and the remainder divided equally between the partners.

Question 43

What are partners entitled to upon dissolution?

Answer 43

Partners are entitled to a return of their capital contribution on a dissolution.

Question 44

Upon dissolution of a partnership, if there is a shortfall meaning that the partners wilkl not recieve a return of the capital they put in (e.g. imagine 3 partners contributed £30k each but there’s only £40k left on winding up) what happens?

Answer 44

The partners should contribute the shortfall in equal proportions.

Question 45

If a partner goes to court to dissolve a partnership due to another partners alleged prejudicial behaviour, what test does the court apply?

Answer 45

Whether, objectively, the conduct of partner B has prejudicially affected the business.

Question 46

What is the effect of one partner becoming bankrupt?

Answer 46

The partnership will be automatically dissolved unless there is provision otherwise in any partnership agreement.

Question 47

Can a partner be expelled from the partnership without a written agreement?

Answer 47

No

Expulsion of a partner is only possible if an appropriate provision is included in a partnership agreement.

It is open to the partners, in drafting their agreement, to agree by what majority and on what grounds a partner may be expelled. Default regs is unanimity.

Question 48

When can a court order dissolution of a partnership if one partner is failing to meet their obligations?

Answer 48

If there is a wilful or persistent breach of the partnership agreement. correct

Question 49

Is a partnership agreement confidential? Does this differ for an LLP?

Answer 49

A partnership agreement is entirely confidential—there is no requirement for its contents to be released to anyone other than the partners.

Whilst an LLP is required to file certain information with the Registrar of Companies, this does not include any agreement between its members.

Question 50

How can a new partner be added to the partnership and added to the agreement?

Answer 50

Deed of adherence

Question 51

When does a partnership commence?

Answer 51

It can commence on a date prior to execution of its agreement and commencement of trading.

Although the date a partnership agreement is executed can determine the commencement, the partnership agreement may—and often do—include a term stating the date on which the partnership commenced, which date may, validly, predate the execution of the agreement and commencement of trading operations.

Question 52

If a new partner agrees to be liable for previous debts, can creditors enforce debts directly against the new partner?

Answer 52

No

Whilst a person may agree with the existing partners to pay a share of debts owed to existing creditors at the time they join the partnership, due to privity of contract, this liability is to the other partners and not the individual creditors or creditors as a body.

Question 53

Can a single partner commit a partnership to a deed?

How should the deed be executed?

Answer 53

No

A single partner cannot bind a partnership to a deed

It is therefore preferable, if there are a small number of partners, for them all to execute the deed personally.

Question 54

If partnership creditors are not be paid in full from partnership property, how do they rank with private creditors in having their claims met from the partners’ private property?

Answer 54

They will rank equally with private creditors in having their claims met from the partners’ private property.

Note, if private creditors of a particular partner cannot be paid in full from private property, they do have a right to claim from partnership property.

Question 55

Partners are entitled to a return of their capital contribution on a dissolution.

If there is a shortfall to meet the return, what should partners do?

Answer 55

If the partners have agreed to share losses equally, they should each contribute an equal amount to enable the return of capital

Question 56

Can a partnership commence and predate the execution of an agreement and commencement of trading operations.

Answer 56

Yes

For example, a partnership agreement stating it commenced on 1 April 2024, executed on 5 April 2024 and commencing trading on 12 April 2024, would start 1 April 2024.

Question 57

What should be included in a partnership agreement to deal with the retiring partner’s share of the partnership business?

Answer 57

A valuation mechanism and method of payment.