Business Structures Flashcards
What is the set up cost of a sole trader?
A sole trader has no set up costs and can therefore start trading immediately
What is the liability risk of a sole trader?
A sole trader faces unlimited personal liability as it is not a separate legal entity. Individual’s personal assets, such as their home and cars, can be sold to meet business debts.
Define the structure of a sole trader.
There is no formal structure
What are the privacy benefits of being a sole trader?
A sole trader enjoys complete privacy as there is no requirement for publicly filed accounts or other formal disclosures.
Explain the formalities involved in operating as a sole trader.
There are no formalities such as Companies House filing or procedural requirements for running a business as a sole trader.
How are sole traders financed?
Through personal capital injection of cash by the sole trader personally. Contracts are formed between the individual themselves and third parties, so an individual can take out a personal loan.
What is the set up costs of partnerships?
Partnerships have no set up costs, allowing them to start trading immediately
Define the liability of partners in a partnership.
Partners have unlimited joint (in contract) or joint and several liability (in tort) for the debts and obligations of the partnership, meaning personal assets may be at risk.
What is the structure (entity) of a partnership?
A partnership is not a separate legal entity.
What are the formalities required to run a partnership?
There are no Companies House filing or procedural requirements for running a partnership. Partnerships can be formed without any formal agreement or even intention.
Explain the privacy aspect of partnerships.
Partnerships offer complete privacy, with no requirement for publicly filed accounts.
How are partnerships financed?
Contracts are formed between third parties and the partners as individuals. Individual partners can take out personal loans or inject their own cash into the partnership.
What are the set up costs of a Limited Liability Partnership?
There are costs involved including legal fees
What is the liability of partners in an LLP.
Partners in an LLP have limited liability, meaning their liability to third parties is restricted to the amount they agreed to pay under the LLP partnership agreement.
What is the structure of an LLP?
The organizational structure of an LLP is flexible and should be decided between the partners in a formal written Members’ Agreement.
What sort of entity is an LLP?
LLP has a separate legal personality.
Explain the privacy of an LLP.
LLPs are required to file annual accounts and other information
How are LLPs financed?
As a separate legal entity, an LLP can borrow in its own name and create floating charges, which are a type of security favored by banks.
What formalities must an LLP comply with
LLPs must be registered at Companies House in the same manner as companies.
What are the set up costs of a company?
There are costs involved in incorporating a company including legal fees.
What is the liability of a company?
The liability of shareholders is limited to the amount unpaid on their shares, meaning they are not personally responsible for the company’s debts beyond their investment.
What is the structure (entity) of a company?
A company is a separate legal entity, meaning it exists independently of its owners, who are not personally liable for the company’s debts.
What are the formalities required for a company to operate?
A company must be registered at Companies House .
Explain the privacy of a company
Companies must make various filings and disclosures at Companies House, which can be onerous, especially for small private companies.
How are companies financed?
Lenders often prefer to lend to companies due to their higher degree of regulation and disclosure, and companies can offer more forms of security for borrowing. Companies can also raise finance by issuing shares.
How does limited liability protect shareholders in case of company insolvency?
If a company becomes insolvent, shareholders are only liable to lose the money they invested in the company, and creditors cannot pursue claims against their personal assets.
How does the concept of limited liability encourage investment.
Limited liability encourages investment by allowing businesses to take risks without exposing shareholders to personal financial loss beyond their investment in the company, which can generate money and benefit the wider community.
How can the doctrine of limited liability be challenged by the courts?
The doctrine of limited liability can be limited or challenged in certain situations where the court may ‘pierce the corporate veil’ in the interests of justice, particularly if the company is seen as a façade.
What strategies can be used to circumvent limited liability?
Strategies to circumvent limited liability may include requiring personal guarantees from shareholders when a bank intends to loan money, or using contractual agreements that shift risk back to the individuals involved.
Define the principle established in Salomon v Salomon.
The principle established in Salomon v Salomon is that a legally incorporated company is a separate person responsible for its own debts and liabilities, distinct from its shareholders and directors.
Describe the tax implications for a sole trader.
A sole trader’s business is not a separate entity, so profits are taxed as the individual’s income for income tax purposes, and gains from one-off transactions are subject to capital gains tax.
Do sole traders have separate business entities for tax purposes?
No, sole traders do not have separate business entities; their business profits are treated as personal income.
Describe the tax treatment of partnerships in the UK.
Partnerships are considered tax transparent, meaning HMRC looks through the partnership to the individual profits and gains of the partners, who are taxed on their shares of profits as either income tax or capital gains tax.
How are partners taxed in a partnership?
Partners are taxed on their individual shares of the profits and chargeable gains, which can be subject to income tax or capital gains tax.
How are profits taxed in a partnership?
The profits in a partnership are not taxed at the partnership level; instead, each partner is taxed on their share of the profits.
Describe the tax treatment of LLPs.
LLPs are treated like a partnership for tax purposes, meaning partners are taxed as individuals on their share of the LLP’s profits and gains.
How are profits taxed in an LLP.
In an LLP, profits flow from the LLP to the partners, who then pay income tax on their respective shares.
How is corporation tax applied to a company’s profits?
Corporation tax is applied at a flat rate on the taxable total profits for the current tax year, and the company itself is liable to pay this tax.
Explain the concept of double taxation in the context of companies.
Double taxation occurs when a company pays corporation tax on its profits and then shareholders are taxed on dividends received as income tax.
What is the tax liability of a company regarding its profits?
The company itself is liable to pay corporation tax on its taxable total profits.
Do public companies have the ability to use written resolutions?
No, public companies cannot pass shareholder resolutions using the written resolution procedure.
What certificate is required for a public company to commence business?
A public company cannot commence business until a trading certificate is issued by the Registrar.
Define the minimum share capital required for a public company.
A public company must have a minimum of £50,000
Describe the minimum share capital required for a private company
A private company must have at least one share, which can be incorporated with one share of 1p.
Are public companies required to hold an Annual General Meeting
Yes.
Are public companies required to have a secretary?
Yes
What is the minimum number of directors required for a public company in the UK?
A public company must have a minimum of 2 directors
Do private companies in the UK need to hold an Annual General Meeting (AGM)?
Private companies are not required to hold an AGM, but they can choose to do so if they wish.
Are private companies required to have a secretary?
No.
How many directors are required for a private company in the UK?
A private company is required to have a minimum of 1 director
State the minimum number of shareholders required for a public company in the UK.
A public company must have a minimum of 1 shareholder
How can public companies raise funds ?
Public companies limited by shares can offer their shares to the public, allowing them to raise funds.
What are the advantages of using written resolutions for private companies?
Using written resolutions results in considerable cost, time, and administration savings for private companies.
Define the exceptions to the use of written resolutions in private companies.
Written resolutions cannot be used for resolutions to remove a director or to remove an auditor.
What advantages do public companies have in terms of financing?
Public companies have greater access to equity and debt finance, including the ability to issue debt securities in international capital markets.
Define the level of regulation for private companies compared to public companies under CA 2006.
Private companies enjoy lighter regulation under CA 2006 than public companies, which require more extensive regulation due to their larger number of shareholders and greater accountability.
How do the management structures of private companies differ from those of public listed companies?
Public listed companies are managed differently as they may have thousands of shareholders, with only a few having any managerial role, while private companies typically have a more direct management structure.
Do all public companies apply for a stock exchange listing?
No, not all public companies apply to have their shares listed on a stock exchange.
What sort of company can apply for a stock exchange listing?
A company must be a public company before it applies to have its shares listed on a stock exchange.
Explain the term ‘listed companies’.
Listed companies are those whose shares are listed on a recognized stock exchange, allowing for trading of those shares.
Why might a plc seek a listing on a stock exchange?
Seeking a listing on a stock exchange, such as the London Stock Exchange, allows a company to permit trading in its shares, making it more attractive to investors.
Explain the treatment of a trade or business carried on by an LLP.
A trade, profession, or business carried on by an LLP with a view to profit is treated as being carried on in partnership by the members, not the LLP itself.
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Describe how members share in capital and profits in an LLP.
Members share equally in capital and profits as per Regulation 7(1).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Define the indemnification obligation of an LLP towards its members.
An LLP must indemnify its members for payments made and personal liabilities incurred in the ordinary and proper conduct of the business, according to Regulation 7(2).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Explain the remuneration policy for members managing an LLP.
No member is entitled to remuneration for managing the LLP, as outlined in Regulation 7(4).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
What is required for a person to become a member of an LLP?
No person can become a member or assign their membership without the consent of all existing members, according to Regulation 7(5).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Describe the decision-making process for ordinary decisions in an LLP.
Ordinary decision making may be by the majority of the members, as per Regulation 7(6).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
What is the requirement for changing the nature of the business in an LLP?
Any proposed change to the nature of the business requires the consent of all the members, according to Regulation 7(6).
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
How must a member account for profits made from competing businesses without consent?
If a member carries on a competing business without consent, they must account for and pay over to the LLP all profits made from that business.
DEFAULT PROVISION IN THE ABSENCE OF AN AGREEMENT
Explain the power of expulsion of a member in an LLP.
There is no implied power of expulsion of a member by the majority unless such power is expressly provided for in a Members’ Agreement.
Describe the tax treatment of individuals in an LLP.
Individuals in an LLP are taxed as individuals, meaning they are liable for income tax or capital gains tax on their share of the LLP’s income or gains.
How is an LLP treated for tax purposes compared to a company?
An LLP is treated as ‘transparent’ for tax purposes, meaning it is not taxed itself, but the partners are taxed on their share of income. In contrast, a company pays corporation tax on its own profits.
Define the taxation implications for individuals receiving dividends from a company.
Individuals receiving dividends from a company may be liable to pay income tax on their dividend income after the company has paid corporation tax on its profits.
What economic reliefs might be available to members of an LLP?
Members of an LLP may have access to reliefs similar to those available to partners, such as relief on interest and the ability to set off losses against other income.
What happens if there are gaps in an LLP’s governance structure?
Gaps in an LLP’s governance structure will not be filled by partnership law due to the disapplication of the PA 1890.
How is the taxation of an LLP similar to that of a traditional partnership?
For tax purposes, an LLP is treated as a partnership, allowing for similar tax treatment and reliefs as traditional partnerships.
Describe how assets held by an LLP are treated for capital gains tax purposes.
Assets held by the LLP are treated as being held by the members as partners for capital gains tax purposes.
Who is responsible for the disposing of an LLP asset such as land.
A disposal of an LLP asset, like land, is regarded by HMRC as a disposal by the members of the LLP while it is trading.
Is an LLP subject to stamp duty
The LLPA provides relief from stamp duty when a partnership is incorporated as an LLP and assets of the partnership business are transferred to the LLP, subject to strict tax avoidance conditions.
What is the VAT registration status for an LLP and its members?
The LLP itself may register for VAT, but not the individual members.
Describe the tax obligations of partners in an LLP regarding profits.
Both partners pay income tax on their share of the profits.
Define the ability of LLPs to create charges over assets.
LLPs can create a floating charge over their assets, a capability not available to traditional partnerships.
Do the roles of members and management differ in LLPs compared to companies?
In LLPs, there is no real distinction between members and the management board, unlike in companies where members/shareholders and the board of directors have distinct roles.
What can members of an LLP agree upon among themselves?
Members can agree on how to share profits, management duties, decision-making processes, appointment of new members, and retirement provisions.
Define the Members’ Agreement in the context of LLPs.
The Members’ Agreement, if present, functions like a private partnership agreement.
Explain the ‘clawback’ rule as it pertains to LLPs.
The ‘clawback’ rule allows for money taken out of the LLP by members up to two years before winding up to be reclaimed for creditor repayment.
Summarize the key characteristics of LLPs.
LLPs have no share capital, indistinct roles between members and management, flexible agreements among members, tax transparency, and are subject to the corporate insolvency regime with a clawback rule.
Describe the filing obligations of LLPs with Companies House.
LLPs must file information regarding changes of name, registered office and email, changes in membership, creation of a charge, annual confirmation statements, and accounts as per the Limited Liability Partnerships (Accounts and Audit) Regulations 2008.
Do LLPs allow for member participation in management?
Yes, LLPs allow a high level of participation in management by the members.
Identify a potential drawback of LLPs for private investors.
Certain tax avoidance measures applicable to LLPs may impinge on private investors who are members.
Describe the requirements for incorporating a Limited Liability Partnership (LLP) according to Section 2(1)(a) LLPA.
Two or more persons must be associated for carrying on a lawful business with a view to profit to incorporate an LLP.
Define the term ‘person’ in the context of LLP incorporation.
In this context, a ‘person’ can refer to both an individual and a company.
How does the term ‘business’ affect the use of LLPs?
The term ‘business’ implies that there must be some commercial activity, which means LLPs are not typically used by non-profit organizations.
What is the process for registering an LLP at Companies House?
The subscribing members must fill out Form LL IN01 and send it to Companies House along with the relevant fee.
What information must be included in Form LL IN01 for LLP registration?
The form must include the name of the LLP, the registered office’s address, the registered email address, and the designation of members.
What document is issued by the Registrar of Companies upon successful LLP registration?
A certificate of incorporation is issued as conclusive evidence that all legal requirements have been complied with.
What happens to the name of the LLP after registration?
The name of the LLP is entered on the index of company names and assigned a number.
Describe the new requirement for registered addresses of LLPs effective March 2024.
The registered address must be an ‘appropriate registered address’, similar to the requirement for companies.
What has ECCTA increased control over regarding LLPs?
ECCTA has increased control over company names, and these restrictions also apply to LLPs.
In what instance will a person be precluded from becoming a member of an LLP
A person may not be a member of an LLP if they are subject to disqualification as a director under the director disqualification legislation.
Define the tax status of LLPs and how this appeals to members
LLPs are tax transparent, allowing members to participate in management while potentially facing certain tax avoidance measures.
Define ‘people with significant control’ (PSCs) in the context of LLPs.
PSCs are individuals who have more than a 25% interest in the LLP or have significant influence or control over the LLP.
What is the purpose of the annual confirmation statement for LLPs?
The annual confirmation statement serves to confirm the accuracy of the information held by Companies House regarding the LLP.
Explain the significance of filing changes in membership for LLPs.
Filing changes in membership is crucial for maintaining accurate records at Companies House and ensuring compliance with legal obligations.
What types of changes must LLPs report to Companies House?
LLPs must report changes of name, registered office and email, membership changes, creation of a charge, and submit annual confirmation statements and accounts.
Define the minimum membership requirement for an LLP.
An LLP must have at least two formally appointed members at all times.
What is the role of designated members in an LLP?
Designated members have obligations such as signing accounts on behalf of the members, making filings at Companies House, and acting on behalf of the LLP if it is wound up.
Explain the conditions under which a member ceases to be part of an LLP.
A member will cease to be a member of the LLP upon their death, agreement with other members, giving notice to other members, or dissolution if the member is a body corporate.
Describe the management structure of an LLP.
An LLP has complete flexibility in terms of management, as the LLPA and the 2001 Regulations do not prescribe any particular management structure.
Define the purpose of an LLP Agreement.
The LLP Agreement is a private document that outlines the formal procedures and arrangements agreed upon by the members for the operation of their business.
How does the absence of a Members’ Agreement affect an LLP?
In the absence of a Members’ Agreement, the 2001 Regulations provide eleven default provisions to govern the relationship among members.
Do members of an LLP need a formal Members’ Agreement?
Members of an LLP are not obliged to have a formal Members’ Agreement to regulate their relationship.
How does an LLP Agreement compare to a partnership agreement?
An LLP Agreement operates similarly to a partnership agreement, outlining how issues will be managed among members.
What happens to a partnership if no fixed term is agreed upon?
If no fixed term is agreed upon, the partnership will be automatically dissolved if any partner leaves.
can a partnership be dissolved if the business becomes unlawful?
A partnership can be dissolved if the partnership business becomes unlawful, as stated in section 34 of PA 1890.
How should a partnership agreement address the roles of partners?
The partnership agreement should clearly outline the requirements for each partner regarding their work for the business, including expectations for time and attention.
Describe the purpose of a written partnership agreement.
A written partnership agreement governs the operation of a partnership, outlining the rights, responsibilities, and obligations of the partners.
List some key provisions typically included in a partnership agreement.
Key provisions often include commencement and duration, partnership name and place of business, partnership property, capital, profits and losses, drawings/salary, accounts, dissolution, duties and powers of partners, decision making, incoming partners, and restrictions.
Explain the significance of including roles and work input in a partnership agreement.
Including roles and work input clarifies each partner’s responsibilities and expectations, helping to prevent conflicts and ensure effective collaboration.
What are the implications of having non-compete clauses in a partnership agreement?
Non-compete clauses restrict partners from engaging in competing businesses during and after their partnership, protecting the partnership’s interests.
How can the retirement or expulsion of partners be addressed in a partnership agreement?
The partnership agreement should outline the procedures and conditions under which partners can retire or be expelled, ensuring a clear process for such events.
Describe the importance of decision-making provisions in a partnership agreement.
Decision-making provisions establish how decisions are made within the partnership, which is crucial for maintaining order and ensuring all partners have a voice.
What is the role of partnership property in a partnership agreement?
Partnership property refers to the assets owned by the partnership, and its management and distribution should be clearly defined in the partnership agreement.
Describe the purpose of PA 1890 in relation to partnerships.
PA 1890 provides a framework for regulating traditional partnerships, serving as ‘fall-back’ provisions in the absence of a partnership agreement or when the agreement is silent on certain matters.
How can partners vary their mutual rights and obligations under PA 1890?
Partners can vary their mutual rights and obligations at any time by unanimous consent, which can be express or inferred from a course of dealing.
Define the sections of PA 1890 that cannot be overridden by agreement.
Sections 1 and 2 regulate when a partnership comes into existence, and sections 5 to 18 determine the relationship between partners and third parties, as well as liability for partnership debts.
How does PA 1890 function in the absence of a partnership agreement?
In the absence of a partnership agreement, PA 1890 serves as a default code that applies to relations between the partners themselves, whether the agreement is written, oral, express, or implied.
What should be considered when drafting a partnership agreement?
When drafting a partnership agreement, clauses should be included that reference the fallback provisions of PA 1890 to ensure clarity on rights and obligations.
Explain the role of sections 5 to 18 of PA 1890.
Sections 5 to 18 of PA 1890 determine the relationship between partners and third parties, as well as the liability for partnership debts.
How can the provisions of PA 1890 be overridden?
Most sections of PA 1890 can be overridden by agreement between the partners, allowing for flexibility in their mutual rights and obligations.
How do default provisions apply if partners start working together before the commencement date?
If partners begin working together before the commencement date, the default provisions of the Partnership Act 1890 will apply until the agreement’s commencement date.
What happens if partners continue business after the expiration of a fixed-term agreement?
If partners continue in business after the expiration of a fixed-term agreement without entering into a new agreement, they are presumed to be partners on the same terms as before, according to section 27 of the Partnership Act 1890.
Describe the restrictions on naming a partnership.
The partnership name must not include terms like ‘limited’, ‘ltd’, ‘LLP’, ‘public limited company’, or ‘plc’, must not be offensive, must not be the same as an existing trademark, must not contain sensitive words, and must not suggest a connection with the government without permission.
What are common provisions found in partnership agreements?
Common provisions in partnership agreements typically include details about the commencement and duration of the partnership, naming conventions, place of business, and the rights and obligations of the partners.
Describe the ownership of partnership property in a partnership.
In a partnership, each partner is deemed to own a share in the property belonging to the partnership, as the partnership does not have a separate legal personality.
Define partnership property according to the Partnership Act 1890.
Partnership property is defined as all property brought into the partnership for the purposes of the partnership business, as stated in Section 20 of the Partnership Act 1890.
How is it determined whether an asset is partnership property?
Whether an asset is partnership property is determined by the intentions of the partners at the time they acquire it, making it a question of fact.
What does Section 21 of the Partnership Act 1890 state about property bought with partnership funds?
Section 21 of the Partnership Act 1890 states that all property bought with money belonging to the partnership is deemed to have been bought on account of the partnership, unless there is evidence of a contrary intention.
Describe the default provisions of the Partnership Act 1890 regarding profit sharing.
The default provisions state that all partners are entitled to share equally in the capital and profits of the business and to contribute equally towards the losses, regardless of their individual capital contributions.
How should partners address profit sharing if the default provisions do not align with their wishes?
Partners should include an express provision in their agreement that sets out a profit sharing ratio (PSR) to reflect their desired arrangement.
Define the implications of unequal capital contributions among partners.
If partners contribute capital unequally, there may be an implied agreement that they are entitled to withdraw their capital unequally, despite the default provisions stating equal sharing.
Do partners have equal rights to profits and losses in a partnership?
Yes, under the default provisions of the Partnership Act 1890, partners are entitled to share equally in profits and contribute equally towards losses.
Describe the concept of ‘drawings’ in a partnership.
Drawings refer to the income profits that partners in a business can take from the partnership. The partnership agreement should specify how much each partner may draw in a given period.
Define the default position regarding salary for partners in a partnership.
The default position is that partners are not entitled to a salary unless it is expressly stated in the partnership agreement.
What must be included in a partnership agreement regarding salaries?
The partnership agreement must expressly state if partners are entitled to receive a salary in addition to their income profit share.
Describe the management roles of partners under PA 1890.
Under PA 1890, every partner may participate in the management of the partnership business but is not required to do so.
Define the decision-making process in a partnership according to PA 1890.
Decisions in a partnership are generally made by a majority, except for specific matters that require unanimity, such as changes to the nature of the partnership business, introducing a new partner, and varying the rights and duties of partners.
How are ordinary business decisions made in a partnership?
Ordinary business decisions are made by a majority of the partners.
Describe the requirement for a new partner to join a partnership under section 24(7) of the Partnership Act 1890.
Unanimous consent of all partners is required for a new partner to join the partnership.
Define the conditions under which a partner can be expelled from a partnership according to the Partnership Act 1890.
A partner cannot be expelled by majority vote unless all partners have previously expressly agreed that a majority can do this.
What is the implication of not having prior agreement on expulsion provisions among partners?
Without prior agreement, it is impossible to expel a partner without their consent or dissolving the partnership.
What is the requirement for introducing a new partner under section 24 of the Partnership Act 1890?
No person may be introduced as a partner without the consent of all existing partners.
Describe the effect of a partner leaving a partnership without an agreement.
The partnership is dissolved, as the continuity is broken by the change in the identity of the partners.
Define ‘technical dissolution’ in the context of partnerships.
Technical dissolution refers to the formation of a new partnership by the remaining partners after one partner leaves, allowing the business to continue without winding up.
How does the departure of one partner affect a two-partner partnership?
The remaining partner becomes a sole trader.
Explain the legal implications of a partner leaving a partnership with no agreement in place.
The partnership is dissolved under section 26 of the Partnership Act 1890, and the remaining partners may form a new partnership.
Describe how a partnership agreement can prevent dissolution when a partner retires.
The partnership agreement should explicitly state that the partnership will continue among the remaining partners and include details on how a partner can leave or be expelled without winding up the partnership.
Define the mechanism that may be included in a partnership agreement for a departing partner.
The mechanism usually includes provisions for the remaining partners to buy out the departing partner’s share and details on how to calculate the value of that share.
How does automatic dissolution occur in a partnership without a fixed term?
Automatic dissolution occurs when any partner leaves the partnership, as per section 26 of the Partnership Act 1890.
Describe the purpose of non-compete clauses in partnership agreements.
Non-compete clauses prevent current partners from competing with the firm, ensuring that they do not engage in similar business activities without consent.
How does section 30 of the Partnership Act 1890 relate to competition among partners?
Section 30 states that if a partner competes with the firm without the consent of other partners, they must account for all profits made from that competing business.
Define the types of restrictions that can be placed on outgoing partners in a partnership.
Restrictions on outgoing partners can include non-compete clauses, non-solicit clauses, and non-dealing clauses, which limit their ability to compete or solicit business from the partnership’s clients.
Do partnership agreements automatically include restrictions on outgoing partners?
No, there are no default clauses regarding restrictions on outgoing partners in the Partnership Act 1890; these must be explicitly included in the partnership agreement.
Explain the significance of non-solicit clauses in partnership agreements.
Non-solicit clauses prevent former partners from soliciting business from the partnership’s clients, protecting the firm’s client relationships.
What is the role of non-dealing clauses in a partnership context?
Non-dealing clauses prevent former partners from entering into contracts with clients, former clients, or employees of the partnership, safeguarding the firm’s business interests.
Define the term ‘dissolution of partnership by notice’.
Dissolution of partnership by notice occurs when any partner notifies the others of their intention to dissolve the partnership, applicable in partnerships without a fixed duration.
What happens to the partnership relationship when a dissolution event occurs?
The partnership relationship ceases when a dissolution event occurs, allowing partners to demand the realization of business assets.
Describe the process of distributing assets when a partnership is wound up.
Once all debts and liabilities have been paid, any remaining money or assets are distributed to partners, starting with the repayment of their original capital.
Define the term ‘asset surplus ratio’ (ASR) in the context of partnership dissolution.
The asset surplus ratio (ASR) is a provision in a partnership agreement that outlines how surplus assets are to be shared among partners after the dissolution of the partnership.
How are surplus assets shared if there is no agreed asset surplus ratio (ASR)?
If there is no agreed ASR, surplus assets are shared according to the agreed profit share ratio (PSR) as per s 44(b)(4) PA 1890.
What happens to surplus assets if there is no profit share ratio (PSR) established in a partnership?
If there is no PSR, surplus assets are shared equally among the partners in accordance with s 24(1) PA 1890.
Explain the implications for a partner who acts without authorization in a business context.
If a partner acts without authorization, they may create a binding contract for the firm, but they could also face liability to the other partners for breaching the terms of their partnership agreement.
Describe the role of an agent in a partnership regarding contracts.
An agent in a partnership acts on behalf of the firm, executing the wishes of the partnership as a whole, and can bind the firm to contracts if given actual, express, or implied authority.
How can partners ensure a contract is binding even if an agent lacked authority at the time of signing?
Partners can ratify the agent’s act by approving the contract either expressly or by performing the contract, which indicates their acceptance.
What happens if all partners agree to a contract executed by an agent?
If all partners agree to the contract executed by an agent, the firm is bound by the contract regardless of the agent’s authority at the time of execution.
Explain the significance of express and implied authority in partnerships.
Express authority is explicitly granted to an agent by the partners, while implied authority is assumed based on the agent’s role and the partners’ consent, both of which can bind the firm to contracts.
How does Section 5 PA 1890 protect third parties in a partnership contract?
It ensures that third parties can rely on the authority of a partner to bind the firm, regardless of the other partners’ contentment with the act.
Describe the conditions under which a partner’s unauthorized act will bind the firm according to s 5 PA 1890.
A partner’s unauthorized act will bind the firm if the act is for carrying on business of the kind carried on by the firm and is done in the usual way that a partner would act on behalf of the firm.
Under what circumstances will the firm not be bound by a partner’s unauthorized act?
The firm will not be bound if the third party knew that the partner was not authorized to enter into the contract or if the third party did not know or believe that the partner was a partner.
Define the liability of a partner who binds the firm without actual authority.
A partner who binds the firm without actual authority may be liable to the other partners for breach of contract.
Explain the term ‘holding out’ in the context of partnership liability.
‘Holding out’ refers to the act of a non-partner presenting themselves as a partner or allowing others to perceive them as such, which can result in personal liability for partnership debts under s 14 PA 1890.
Describe the concept of apparent authority in the context of agency law.
Apparent authority arises when a principal, such as a firm, represents or allows a representation to be made to a third party that a person has the authority to bind the firm, even if that person does not have actual authority.
What happens when a firm uses an ex-partner’s name on letterhead after their retirement?
When a firm continues to use an ex-partner’s name on letterhead after their retirement, it may be considered ‘holding out’ that ex-partner as a current partner, which can grant them apparent authority to bind the firm.
Do partners submit individual tax returns?
Yes, partners submit their own individual tax returns containing all income received from the partnership as well as other income receipts.
What types of income must partners report in their tax returns?
Partners must report income from the partnership as well as other income receipts, including savings, dividends, and rental income.
What taxes are partners in a partnership liable to pay?
Partners are liable to pay both income tax and capital gains tax.
Explain the legal status of a partnership in terms of tax obligations.
A partnership is not a distinct legal entity and therefore does not itself pay tax; instead, partners are taxed individually.
Explain the liability of partners regarding partnership profits.
Partners are jointly and severally liable for partnership liabilities, but each partner is only liable for their own income tax on their share of profits.
What happens when a partnership disposes of a capital asset?
When a partnership disposes of a capital asset, each partner is treated as making a disposal of their fractional share and will be taxed accordingly.
Define the personal liability of partners in a partnership.
Every partner in a firm is jointly liable with other partners for all debts and obligations incurred while they are partners.
Can a company be a partner in a traditional partnership?
Yes, the Partnership Act 1890 does not distinguish between actual and legal persons, so a company could be a partner.
Describe the main reason clients seek help to avoid creating a partnership.
Clients often seek help to avoid creating a partnership due to concerns about unlimited liability and the outdated nature of the legislation governing partnerships, specifically the PA 1890.
How does the cost of creating a partnership compare to other business structures?
Creating a partnership costs nothing as there are no formalities required, unlike other business structures that may involve registration fees and compliance costs.
What are the confidentiality advantages of conducting business through a partnership?
Partnerships allow for a high degree of confidentiality regarding the business’s affairs, as there are no filing or disclosure requirements unlike heavily regulated companies.
How do partnerships typically evolve in the business lifecycle?
Many businesses start as partnerships before they convert to a limited company as they grow and require more formal structures.
What are the operational requirements for running a partnership?
There are no required formalities for running a partnership, making it less regulated compared to companies.
Define the fiduciary relationship in the context of partnerships.
In partnerships, the fiduciary relationship refers to the obligation of partners to act in the best interests of each other, prioritizing the partnership’s welfare over personal gain.
Is of unauthorized personal profit allowed in partnerships.
Section 29(1) of the Partnership Act 1890 states that partners are prohibited from making unauthorized personal profits from partnership activities, ensuring that all profits are shared equitably.
How many persons are required to form a traditional partnership?
There must be at least two persons to form a partnership.
How are partnership debts treated under the PA 1890?
Partnership debts are treated as obligations for which every partner is jointly liable.
Describe the liability of new partners in a partnership regarding debts incurred before their joining.
Under section 17(1) of the Partnership Act 1890, a new partner is not automatically liable for debts incurred by the partnership before they joined.
How can a retired partner be relieved from existing liabilities of the partnership?
A retired partner can be relieved from existing liabilities if the partnership novates the relevant agreement with the consent of the creditor, as stated in section 17(3) of the Partnership Act 1890.
Define the liability of former partners for debts incurred after their departure from the partnership.
Former partners can be held liable for partnership debts incurred after their departure if a third party treats all apparent partners as jointly liable, unless the third party has been notified of the change.
What are the two types of notice that can relieve a former partner from liability for new debts?
The two types of notice are actual notice, which is for those who had dealings with the partner before their departure, and constructive notice, which is provided through publication of the departure in the London Gazette.
Explain the conditions under which a former partner is not liable for debts to third parties.
A former partner is not liable for debts to any third party who did not know them to be a partner before they left, and no notice needs to be given to such persons.
Describe the circumstances under which a non-partner may be personally liable for partnership debts according to s 14 PA 1890.
A non-partner may be personally liable for partnership debts if they have held themselves out as a partner or knowingly allowed themselves to be held out as such, which involves a representation to a third party, the third party’s action in response, and the third party’s belief in the representation.
