Business - Partnerships (2) Flashcards
What are partnerships?
Partnerships: Partnerships are unincorporated businesses in which two or more persons carry on a business in common with a view of profit (s1 Partnership Act 1890).
What is the Partnership Act 1890 default position on decision making?
Decision-Making: Decisions are made by simple majority (s24).
Under the Partnership Act 1890 which decisions require unanimous consent?
Unanimous Decisions: Three decisions require unanimous consent:
- Changing the nature of business (s24);
- Introducing a new partner (s24); and
- Changing the partnership agreement (s19).
Which sections of the partnership agreement under Partnership Act 1890 cannot be altered by bespoke agreement?
Most of the Act can be altered by bespoke agreement, except:
- Determining how and when the partnership comes into existence (ss1-2); and
- Determining liability to third-parties (ss5-18).
What are bespoke partnership agreements?
Bespoke Agreements: Most of the default provisions can and are overwritten by bespoke agreements.
(1) Contract: This is a contract governing the rights, duties and liabilities of the partnership and partners. A breach of its terms constitutes a breach of contract.
(2) Formalities: Contracts may be written, oral, or implied through conduct. Typically, they are written by solicitors.
What needs to be considered when partnerships are formed?
Formation of Partnerships: Partnerships arise when two or more persons carry on a business in common with a view of profit. This means they can arise without the knowledge of the partners comprising them.
(1) Factors: Factors indicating that a partnership has formed involve a business in which two or more persons: a) take part in decision making; b) are named on deeds of property; or c) share in profits (s2).
(2) Considerations: There are a number of considerations to be made when forming a partnership, most of which will need to be made in a bespoke agreement.
What considerations are important when forming a partnership?
Considerations: The following issues require consideration:
(1) Name: The name is generally the name of the partners, i.e. ‘Smith and Smith’.
>Same name restrictions as companies.
(2) Place of Business: A place of business should be stipulated by bespoke agreement, for service of documents.
(3) Length of Partnership: The length of the partnership should be determined, either at a fixed length or to continue ‘at will’.
>By default, they will dissolve on bankruptcy, death, or retirement of a partner.
(4) Partner Rights: The rights and roles of partners should be determined, such as entitlement, salary, role, working hours, financial input etc.
>Non-compete clause is implied by default, but nothing else.
(5) Profit and Loss: The share of profit and loss between partners should be determined. This includes a ‘drawdown’ clause stipulating the sum of earnings that can be withdrawn monthly.
>Profit and loss is shared equally by default, irrespective of input.
(6) Asset Ownership: The ownership and effect of ownership on dissolution should be determined.
>Partners own the assets equally by default.
How are partnerships dissolved?
Dissolution of Partnerships: Dissolution is the termination of a partnership. The business itself may continue in the guise of a new partnership (depending on the terms of a bespoke agreement).
(1) Default Dissolution: By default (subject to alteration), partnerships will dissolve when:
- Unlawful: The firm’s business is unlawful (s34). This cannot be removed by bespoke agreement.
- Retirement: A partner retires (s26). They can insist on full sale of the business (s39).
- End of Term: End of the fixed term in the bespoke agreement (s32).
- Death: A partner dies (s33).
- Bankruptcy: A partner becomes bankrupt or their partnership share charged for a debt (s33).
(2) Court Order: The court can order dissolution if petitioned on the following grounds (s35).
- Incapable: Partner is permanently incapable of performing roles.
- Prejudice: Partner’s conduct is calculated to be prejudicial.
- Wilful Breach: Partner is wilfully and persistently breaching agreement.
- Loss Making: Partnership can only be continued at a loss.
- Just and Equitable: Any other reason the court finds ‘just and equitable’.
(3) Bespoke Agreement: Court ordered dissolution addresses the issue of not being able to remove a partner by default. In practice, partnerships will include expulsion clauses in the bespoke agreement to avoid this possibility.
What is the effect of partnership dissolution?
Effect of Dissolution: Dissolution is very complicated by default. Bespoke agreements should mitigate these issues.
(1) Partial Dissolution: Bespoke agreements can provide that a dissolved partnership will simply continue with one fewer partner.
What duties to partners have in a general partnership?
Partners: Partners are the parties subject to the partnership agreement. They are both owners and managers of the business.
Duties: Partners are subject to general duties, as well as any duties imposed by a bespoke agreement.
(1) Transparency: By default, partners must be completely transparent regarding any relevant information.
(2) Private Profits: By default, partners cannot make private profits, and must account to the business any profits they have made outside of the partnership without consent.
(3) Non-Compete: By default, partners cannot carry on or engage with any business of the same nature or competing with the partnership, and must account any profits made as such.
(4) Loss Sharing: By default, partners share in any loss made by the business, in the proportions agreed in the partnership agreement (equally by default).
(5) Indemnity: By default, partners must indemnify other partners for bearing more than a fair share of loss in any action against or liability of the partnership. By bespoke agreement, partners will typically agree to indemnify partners for more than a fair share of loss borne after retirement, as well.
(6) Compensation: By bespoke agreement, partners typically agree to compensate other partners on retirement or dissolution, and generally pay them 5% interest on their partnership share per annum until repaid.
Where do partners derive their authority to act on behalf for a general partnership?
Authority to Act: Partners will bind partnerships to third-party arrangements provided they have ‘authority’ to act. In practice, they will generally have at least apparent authority.
(1) Actual Authority: Partnerships have actual authority to enter a transaction when all partners act jointly, or a partner is expressly or impliedly authorised to enter by the other partners (s6).
- Express: Partner has been instructed to enter a transaction, or the transaction is of a sort that is permitted as part of their role.
- Implied: Partner has implied authority if they regularly enter said transactions without objection, or the partnership is run ‘without limits’.
(2) Apparent Authority: Partners have apparent authority when a transaction is one which relates to the business of the partnership, and for which a partner would be expected to have authority to enter, provided the other party does not know the partner has no actual authority, and knows or believes the partner to be a partner.
- Indemnity: Where partners act in the knowledge they have no actual authority, they may be liable to indemnify other partners for the full loss.
How are partners removed?
Removal: By default, partners cannot be removed unless the partner themself agrees to be removed. Bespoke agreements will rectify this issue through specific ‘expulsion clauses’.
What is the liability of partners?
Liability: Partners are jointly and severally liable for the liabilities of the business, and can be sued for the entirety of a debt suffered by the partnership (to be indemnified by other partners later).
(1) Tax: Partners are liable for VAT, NI, and income tax.
(2) Tort: Partners may be liable in tortious negligence, as well as vicariously liable for other partners (s10).
(3) Debts: Partners are liable for the debts and liabilities of the partnership to third parties during their tenure. New partners are only liable for contracts arising from the point of entry onwards, unless they agree otherwise (s17).
(4) Contributions: Courts will order partners to indemnify the debts of other partners who have paid more than a ‘fair share’ of the partnership’s liabilities (CL(C)A 1978).
What is a partner’s liability on retirement?
Liability on Retirement: The liability of partners following retirement will differ. A number of steps must be taken to absolve former partners of liability.
(1) Outstanding Liabilities: Retirees remain liable to any contract or arrangement of the partnership that arose during their time as partner. Partnership agreements usually require partners to ‘leave in’ a sum of money to satisfy any such debts that may arise, but they can seek contribution from other partners where required.
- Novation Agreement: Rarely, the remaining partners may enter a ‘novation agreement’ by deed releasing a retiree from existing liabilities of the partnership. Relevant creditors must also enter this agreement. This either requires a new partner to adopt the retiree’s liability, or consideration to be offered.
(2) Post-Retirement Liabilities: Partners are not liable for liabilities that arise after retirement provided they provide actual notice of their retirement, unless they retire due to death or bankruptcy.
- To Creditors: Existing and former creditors must be given direct notice of the retirement.
- To Others: Other parties will be notified provided the partner places notice of their retirement in the London Gazette, comprising notice ‘to the world’.
(3) Holding Out: Non-partners, including former partners, will be liable for a liability of the partnership if it was ‘held out’ to a third party that they were a partner, and the individual knew of and did nothing to rectify this (s14).
>I.e. Individual’s name is on advertising materials, was mentioned in conversation, or otherwise. If the individual is aware of this, they must make an effort to rectify the situation, else they are liable for holding out.
