Chapter 6 Flashcards
Sole trader
A person who owns and runs a business they provide the capital and earn the profits or suffer the losses of the busines. The business is not a speedster legal entity to the owner
Advantages of sole trader
No formal set up process required
Independence, privacy
Personal supervision
Profits accrue to sole trader
Disadvantages of sole trader
Unlimited liability for loses of the business
Reliance on the individual results in long hours
Succession issues
Skill of trader
Usually small so struggles with funding expansion etc
Ordinary partnerships
The relation which subsists between persons, carrying on a business in common with a view of profit
‘Between person’ partnership
Person include companies. There must be at least two partners
‘Carrying on business’ partnership
includes every trade, occupation or profession
It can be a single transaction. The business must involve some activity. Eg not holding property
A partnership begins when the agree to conduct their business activity together which may well be before the business actually begins to trade.
‘With a view of profits ‘ parenterhsip
the test is one of intention so if partners intent to make a profit but make a loss it’s still a partnership.
However if it’s to gain experience for example then it’s not a partnership
How are partnerships formed
By a formal partnership deed which sets out the terms of the agreement between the partners. However no such formality is required. Where there is no express agreement the basic rights and duties of the partners described in the partnership act 1980 applies
Partners owe fiduciary duties to the partnership these are
To act in good faith
Not to Excersise a legal right for an improper motive
Not to keep profits derived from the partnership without consent of the other partner
To avoid conflict of interest without full disclosure
Provisions of the partnership act
Profits and loss
Capital deficiency
Management
Change in business
New partners
Variation
Indemnity
Remuneration
Profit and losses Provisions of the partnership act
Shared equally in the since on contract agreement.
Capital deficiency Provisions of the partnership act
Remaining partner share a capital deficiency. (What a partnership owed bus cannot pay back) not as a loss but in ratio to the amounts of capital which they originally contributed to the firm
Management Provisions of the partnership act
Every partner is entitled to take part in managing the firms business ordinary management decisions can be made by a majority of partner
Change in business Provisions of the partnership act
Any decision on changing the nature of the partnerships business must be unanimous
New partners Provisions of the partnership act
New partners must only be introduced with the unanimous content of existing partner
Variation Provisions of the partnership act
The partnership agreement may be varied with the consent of all the partners
Indemnity Provisions of the partnership act
The firm must indemnify any partner against liabilities incurred in the ordinary and proper conduct of the partnership business or in doing anything necessarily done for the preservation of the partnership property or business
Remuneration Provisions of the partnership act
No partner is entitled to remuneration for acting in the partnership business
Interest on capital Provisions of the partnership act
None is paid on capital gains accept by agreement however a partner is entitled to 5% interest on advances
Records and accounts Provisions of the partnership act
These must be kept at the main place of business and must be open to inspection by all partners
Expulsion Provisions of the partnership act
A partner may only be expelled by a majority of votes when the partnership agreement allows even then the power must only be used in good faith and for good reason
Dissolution Provisions of the partnership act
The authority of the partners after dissolution continues so far as is necessary to wind up the partnership affairs and complete transactions already begun. In dissolution, any partner can insist on realisation of the firms assets, payment of the firms debts and distribution of the surplus
Partners liability and authority
Partners are jointly and severally liable in so far as they bind in the firm
Rule 1 of partners liability and authority
Each partner os the agent of the partnership and his fellow partners for the purpose of business if the partnership unless:
He has no authority to act for the firm in the particular matter
The person with whom he is dealing either knows that he has no authority or doesn’t know it belive him to be a partner
If any restrictions is placed on a partner authority to bind the firm, no act done in contravention of that restriction is binding on the firm where the third party has notice of the restriction. The perception of the third party is key here
Rule 2 of partners liability land authority
Where a partner pledged the credit of the firm for a purpose which has no apparent connection with the firms ordinary business the firm will not be bound unless he has actual express authority to go do do
Rule 2 lia
Debts incurred before partner joined
Note that a new partner admitted that of an existing firm is liable for debts incurred only after he becomes a partner
Debts incurred whilst he is a partner
The partner is liable for the debts incurred whilst he is a partner even after he has left the firm. He may agree with his continuing partners that they should indemnify him for these debts or he may negotiate a release with the creditor
Debts which incurred after partner leaves firm
The liability of the partnership for acts before he retired is not affected by that partners retirement
He is also liable for debts of the firm incurred after his retirement if the creditor knew him to be a partner and had not had notice of retirement
Therefore it is vital on retirement that a partner gives notice to all the creditors of the firm
The partnership act 1890 provides that a partnership is dissolved in the following instances
-the death or bankruptcy of a partner, although it is usual for the partnership agreement to override this
-Expiry of a fixed term
-Completion or termination of a single joint venture if applicable
-Subsequent illegality
-Notice given by a partner if it is a partnership of indefinite duration
-All of the court, for example where it is deemed just an equitable to do so
Limited liability partnerships
Hybrid between company and partnership
Key point is that it has a seperate legal personality so have the benefit of limited liability in the same way to the members of the company
Formation of LLP
The incorporation document must be submitted to the registrar of companies. The following information must be given
-name of LLP
-Location. Of registered office
-address of said office
-names and addresses of all members of LLP
-names of 2 designated members who are to be responsible for signing notices and accounts
-registration fee
Partnership agreement
An LLP is not required to have a formal partnership agreement dealing with matters of internal regulation and duties owed by the partners to eachother. Any such agreement doesn’t have to be filed with the registrar.
In the absence of any express agreement to the contrary the provision of the act and the limited liability partnership regulation 2001 will apply
These regulations apply the provisions of companies legislation to LLP and also default provisions in line with the partnership act dealing with profit share remuneration inspection of books and expulsion
Regulation of LLP
An LLP must keep and retain accounting records to companies with a few minor modifications
Special rules for small and medium sized LLPs and audit exemption rules apply as they do to companies. There is no requirement to provide the equivalent of a directors report
An LLP must maintain a register of charters with the registrar
To notify the registrar of any change to membership designated member or registered office within 14 days
To provide the name of the LLP on correspondence and outside its place of business
To deliver a confirmation statement to registrar
As in the case of companies turners of an LLP may apply to the court in cases of unfair prejudice although this right can be excluded with unanimous consent for an agreed period
A member may be found guilty of fraud or liable to disqualification in the same way the director of a company can
Partnership act provides that each member is an agent of the LLP and therefore has the power to bind the LLP by his acts. However the LLP will not be bound where
The member doesn’t have authority
The third party is aware he does not have authority or doesn’t know or belive him to be a member of the LLP
Dissolution of an LLP
Can be dissolved by unanimous agreement of the partners and following a formal procedure for winding up
Where the LLP becomes insolvent, members of the LLP may propose a voluntary arrangement, apply to put the business into administration or resolve to go into voluntary or compulsory liquidation
Differences to wind up LLP in comparison to companies
Withdrawals made by members within two years prior to winding up may be clawed back if it can be shown that the member at the time knew or had reasonable grounds to believe the LLP would become insolvent
On a winding up past and present members may be required to contribute to the assets of the LLP to the extent that they have agreed to do so in any LLP agreement
