Chapter 6 - Types of trade

Question 1

What is a sole trader?

Answer 1

A sole trader is a person who owns and runs a business, provides the capital, earns the profits, and suffers the losses. They may employ others, but the business is not a separate legal entity from the owner.

Question 2

What are the advantages of being a sole trader? (4)

Answer 2

No formal setup process is required (except for tax notifications or regulated industries).
Independence and privacy.
Direct personal supervision.
All profits accrue to the sole trader.

Question 3

What are the disadvantages of being a sole trader? (5)

Answer 3

Unlimited liability for business losses.
Reliance on the individual often results in long working hours.
Succession issues if the owner is unavailable.
Business success is dependent on the skill of the trader.
Often small-scale businesses struggle with funding, expansion, and diversification.

Question 4

Which of the following is NOT a feature of a sole trader?
A) Unlimited liability.
B) Sharing profits with investors.
C) No separate legal entity from the owner.
D) Independent decision-making.

Answer 4

B) Sharing profits with investors.

Question 5

Define a partnership.

Answer 5

A partnership is “the relation which subsists between persons carrying on a business in common with a view of profit” (Partnership Act 1890, Section 1).

Question 6

What are the key features of a partnership? (4)

Answer 6

1. No separate legal personality: A partnership is a relationship between persons, not a distinct legal entity.
   2, At least two partners: “Persons” can include companies.
2. Carrying on a business: Partnerships include all trades, occupations, and professions, but the business must involve some activity (e.g., not just holding property).
3. Common intention: Partners must intend to share profits, even if they incur losses.

Question 7

Can a single transaction constitute a partnership?

Answer 7

Yes, if the transaction involves partners acting together with the intention of carrying out business (often referred to as a “joint venture”).

Question 8

When does a partnership begin?

Answer 8

A partnership starts when partners agree to conduct business together, even if the business has not yet started trading. For example, leasing premises and opening a bank account could establish a partnership.

Question 9

Can a partnership exist without profit?

Answer 9

Yes. If the intention is to make a profit but the venture incurs a loss, it is still a partnership. However, if the aim is solely to gain experience (e.g., not profit), then it is not considered a partnership.

Question 10

Which of the following would NOT qualify as a partnership?
A) Two people running a business to make a profit.
B) A group pooling funds to lease equipment for a business.
C) People jointly holding property for investment.
D) Individuals working together to gain experience in a trade.

Answer 10

D) Individuals working together to gain experience in a trade.

Question 11

INTERACTIVE QUESTION 10: PARTNERSHIPS

Identify whether the following statements are true or false in relation to an ordinary partnership.

TRUE OR FALSE
A In England and Wales, an unlimited partnership has no existence distinct from the partners
B Partners share equally in the venture’s profits

Answer 11

A TRUE

B TRUE (subject to any contrary agreement)

Question 12

How are partnerships typically formed?

Answer 12

Partnerships are often established through a formal partnership deed outlining the terms of the agreement. However, no formality is required, and the basic rights and duties in the Partnership Act 1890 apply if there is no express agreement.

Question 13

What happens if a partnership agreement specifies profit-sharing but not loss-sharing?

Answer 13

Losses are shared in the same proportions as profits in the absence of specific provisions.

Question 14

Define Fiduciary duties

Answer 14

Fiduciary duties are legal obligations of loyalty and trust that one party owes to another. These duties typically arise in relationships where one person places special trust, confidence, or reliance on another, who has a corresponding duty to act in the best interest of the first party.

Question 15

What fiduciary duties do partners owe to the partnership? (4)

Answer 15

Act in good faith.
Avoid exercising legal rights (e.g., expelling a partner) for improper motives.
Share profits derived from the partnership with consent from all partners.
Avoid conflicts of interest without full disclosure.

Question 16

What are the consequences of breaching fiduciary duties in a partnership?

Answer 16

The partner may be held responsible for accounting for any monies received or compensating for any losses caused to the partnership.

Question 17

How are profits and losses shared under the Partnership Act 1890?

Answer 17

Profits and losses are shared equally unless the partnership agreement specifies otherwise.

Question 18

How is a capital deficiency managed in a partnership?

Answer 18

Any unpaid capital (a partnership debt that cannot be repaid) is shared proportionally among partners based on their original contributions.

Question 19

Who is entitled to manage the partnership business?

Answer 19

Every partner is entitled to participate in the management, with ordinary management decisions made by a majority of partners.

Question 20

What decisions require unanimous consent among partners?

Answer 20

Changing the nature of the partnership’s business.
Introducing new partners.
Varying the partnership agreement.

Question 21

Are partners entitled to remuneration for their involvement in the business?

Answer 21

No, partners are not entitled to remuneration unless explicitly agreed upon.

Question 22

Which of the following requires unanimous consent in a partnership?
A) Allocating profits unequally.
B) Hiring new employees.
C) Changing the business focus.
D) Buying new equipment.

Answer 22

C) Changing the business focus.

Question 23

Are partners entitled to interest on their capital contributions?

Answer 23

No interest is paid on capital unless agreed upon. However, partners are entitled to 5% interest on advances beyond their original capital contributions.

Question 24

What are the rules regarding records and accounts in a partnership?

Answer 24

Records and accounts must be kept at the main place of business and be open to inspection by all partners.

Question 25

How can a partner be expelled from a partnership?

Answer 25

A partner can only be expelled by a majority vote if the partnership agreement allows it, and the expulsion must be in good faith and for good reason.

Question 26

What happens during the dissolution of a partnership?

Answer 26

1. Partners retain authority to wind up partnership affairs and complete ongoing transactions.
2. Any partner can request the realization of the firm’s assets, payment of debts, and distribution of surplus.

Question 27

What happens if the partnership dissolves?
A) Partners lose all authority immediately.
B) Partners can complete ongoing transactions and distribute assets.
C) All assets revert to a single partner.
D) No debts are paid during dissolution.

Answer 27

B) Partners can complete ongoing transactions and distribute assets.

Question 28

Interactive question 11: Partnership regulation

Dolittle Solicitors has four partners, Ahmed, Bridget, Charles and Don. Ahmed, Bridget and Don want to invite Edith to be a partner. Charles does not want to invite Edith to be a partner because he does not feel that she has sufficient experience in a senior position in the firm yet. Ahmed, Bridget and Don decide to expel Charles from the partnership and invite Edith to take his place. Ahmed also wants to be paid a salary as he carries out many of the administrative functions of the partnership. There is no provision for new partners in the partnership agreement, but the agreement does allow partners to remove partners by majority decision. Are the following statements true or false?

A Ahmed, Bridget and Don may invite Edith to be a partner without Charles’ consent
B Ahmed, Bridget and Don may not expel Charles from the partnership on these grounds
C Ahmed is not entitled to a salary for acting in the partnership business

Answer 28

A False. All existing partners must consent to new partners being admitted.

B True. Even where the partnership agreement allows for the expulsion of a partner, it must be in good faith and for a good reason, not just because he doesn’t agree with a policy of the other partners, apparently on reasonable grounds.

C True. The partners could agree to pay him a salary but he has no right to one.

Question 29

Are partners jointly or individually liable for the acts of their fellow partners?

Answer 29

Partners are jointly and severally liable for the acts of their fellow partners to the extent that these acts bind the partnership.

Question 30

What is Rule 1 regarding a partner’s authority?

Answer 30

Each partner is an agent of the partnership and their fellow partners for the business of the partnership unless:

The partner has no authority in the specific matter.
The third party dealing with the partner knows they lack authority or does not believe them to be a partner.

Question 31

How does a restriction on a partner’s authority affect the partnership?

Answer 31

If a restriction is placed on a partner’s authority, acts done in violation of that restriction are not binding on the firm if the third party is aware of the restriction.

Question 32

What is Rule 2 regarding pledging the firm’s credit?

Answer 32

If a partner pledges the firm’s credit for a purpose unconnected to the firm’s ordinary business, the firm is not bound unless the partner has actual express authority.

Question 33

How does a partner’s liability depend on when debts were incurred?

Answer 33

Debts incurred before joining: A new partner is not liable for debts incurred before they joined the partnership.

Debts incurred while a partner: A partner is liable for debts incurred while they were a partner, even after leaving the firm.

Debts incurred after leaving: A retiring partner is liable for debts if the creditor knew them to be a partner and was not notified of their retirement.

Question 34

What must a retiring partner do to avoid liability for post-retirement debts?

Answer 34

A retiring partner must give notice to all creditors of the firm to avoid liability for debts incurred after their retirement.

Question 35

When is a retiring partner still liable for firm debts?
A) When they have left without notifying creditors.
B) When they agree to indemnify the continuing partners.
C) When the debt was incurred after they left and the creditor was unaware of their retirement.
D) Both A and C.

Answer 35

D) Both A and C.

Question 36

Can a partner negotiate to avoid post-retirement liability for firm debts?

Answer 36

Yes, they can negotiate with their continuing partners to indemnify them for these debts or negotiate directly with the creditors for a release.

Question 37

What is the dissolution of a partnership?

Answer 37

What is the dissolution of a partnership?
Answer: Dissolution refers to the formal process of ending a partnership, resulting in the termination of the business relationship between partners.

Question 38

Under the Partnership Act 1890, what events lead to the dissolution of a partnership? (6)

Answer 38

1. Death or bankruptcy of a partner (unless the partnership agreement overrides this).
2. Expiry of a fixed-term partnership.
3. Completion or termination of a single joint venture.
4. Subsequent illegality making the partnership’s purpose unlawful.
5. Notice given by a partner in an indefinite duration partnership.
6. Order of the court where it is deemed just and equitable.

Question 39

What is a common provision in partnership agreements regarding dissolution?

Answer 39

It is common for partnership agreements to include provisions for the business to continue upon the death, retirement, or bankruptcy of a partner.

Question 40

How can creditors cause the dissolution of a partnership?

Answer 40

If the partnership defaults on a debt, creditors can take action against individual partners or the partnership as a whole. This may result in court-ordered dissolution, similar to winding up a company.

Question 41

Which of the following can cause partnership dissolution without a court order?
A) Expiry of a fixed-term partnership.
B) Disputes between partners.
C) Subsequent illegality.
D) Both A and C.

Answer 41

D) Both A and C.

Question 42

What does “subsequent illegality” mean in the context of dissolution?

Answer 42

It refers to a situation where changes in the law make the partnership’s business purpose illegal, requiring the partnership to dissolve.

Question 43

When can a court order the dissolution of a partnership?

Answer 43

A court can order dissolution when it is deemed just and equitable to do so, such as in cases of significant disputes or mismanagement.

Question 44

True OR False A partnership automatically dissolves if one partner dies.

Answer 44

False. While death can lead to dissolution, partnership agreements often include provisions to allow the business to continue.

Question 45

What is a Limited Liability Partnership (LLP)?

Answer 45

An LLP is a hybrid between a company and a partnership. It has a separate legal personality like a company and provides partners with limited liability, similar to company members.

Question 46

Which act introduced LLPs?

Answer 46

The Limited Liability Partnerships Act 2000.

Question 47

What information must be provided when forming an LLP? (6)

Answer 47

1. The name of the LLP (ending with “Limited Liability Partnership” or “LLP”).
2. The location of its registered office (e.g., England and Wales).
3. The address of its registered office.
4. Names and addresses of all members of the LLP.
5. Names of two designated members responsible for signing notices and accounts.
6. A registration fee.

Question 48

What must be included in an LLP’s incorporation document?
A) A list of the LLP’s suppliers
B) Names of two designated members
C) Confirmation of profit-sharing ratios
D) A list of clients

Answer 48

B) Names of two designated members

Question 49

Is a formal partnership agreement required for an LLP?

Answer 49

No, but it is common to have one. If absent, the provisions of the Limited Liability Partnerships Act 2000 and Partnership Act 1890 apply by default.

Question 50

How does the regulation of LLPs mirror that of companies? (5)

Answer 50

1. LLPs must keep accounting records, prepare and publish annual accounts, and have them audited (like companies).
2. Small- and medium-sized LLPs may qualify for audit exemptions.
3. LLPs must maintain a register of charges and report changes in membership, designated members, or office location within 14 days.
4. LLPs must provide their name on correspondence and business premises.
5. Members may apply to the court for unfair prejudice, though this right can be excluded with unanimous agreement.

Question 51

What happens if an LLP member engages in fraudulent or wrongful trading?

Answer 51

They may be found guilty and face disqualification, similar to a company director.

Question 52

TRUE OR FALSE
An LLP is required to file a directors’ report annually.

Answer 52

False. There is no requirement for an LLP to provide an equivalent of a directors’ report.

Question 53

When can’t a member of an LLP bind the LLP through their actions?

Answer 53

A member can bind the LLP unless:

1. They lack authority to act.
2. The third party is aware of or believes they lack authority or are not a member

Question 54

How is the authority of LLP members similar to partners in a partnership?

Answer 54

LLP members act as agents of the LLP, with the power to bind the LLP unless they lack authority and the third party is aware of this.

Question 55

How can an LLP be dissolved? (2)

Answer 55

1. By unanimous agreement of members (or as per the LLP agreement).
2. Through insolvency proceedings, including administration, voluntary arrangement, or liquidation.

Question 56

What are two key differences in the winding up of an LLP compared to a company?

Answer 56

Withdrawals made by members within two years prior to winding up may be clawed back if the member knew or should have known the LLP was insolvent.

Past and present members may be required to contribute to the LLP’s assets as agreed in the LLP agreement.

Question 57

What happens if a member withdraws funds shortly before an LLP becomes insolvent?
A) The withdrawal is ignored.
B) The withdrawal may be clawed back if the member knew the LLP was insolvent.
C) The withdrawal is treated as a loan.
D) The withdrawal is shared among other members.

Answer 57

B) The withdrawal may be clawed back if the member knew the LLP was insolvent.

Question 58

Define insolvent

Answer 58

Does not have enough assets to meet all of its debts or is unable to pay its debts when they fall due

Question 59

4 Lola and May are in partnership. Their business, Lomays & Co, buys gift products made by local craftsmen and sells them through well-known retail outlets. Lola sometimes receives a commission from the suppliers, supposedly for Lomays & Co, when she places an order for a large number of products. She rarely informs May of the commission nor does she pay the commission into the firm’s bank account. Lola, to May’s knowledge, also purchases homemade cards from Original Greetings Ltd, a company that she owns and runs with another friend, and sells them along with other items through the Lomays business.
Requirement:
Which of the following best describes the legal position, in view of the fiduciary duties owed by partners?
A May is entitled to buy out Lola’s share of the business.
B Lola must account to Lomays & Co for commission monies received.
C Lola must account to Lomays & Co for commissions received and profits made by Original Greetings Ltd on cards sold through Lomays & Co.
D Lola must account for commission monies received and must refrain from selling products of Original Greetings Ltd through Lomays & Co because of the obvious conflict of interest.
LO 2a

Answer 59

Correct answer(s): B Lola must account to Lomays & Co for commission monies received.
A partner is required to avoid conflicts of interest without full disclosure to the other partners. If the other partners know of the conflict and do not object, then the partner may proceed. A partner must account to the partnership for all monies received in respect of it.

Question 60

6 Millie, Gemma and James are in partnership running a business organising conferences. Gemma and James nominate Millie to advertise their business and they all agree a total budget of £3,000 for this purpose. Millie feels that they should advertise in some glossy magazines as well as newspapers but knows that Gemma and James will not agree. Nevertheless, Millie places an advertisement with Upmarket Businesses, a high-quality monthly glossy magazine. This incurs an additional cost of £2,000 (resulting in a total cost of £5,000), to be paid within 30 days. When Gemma and James hear about it, they are angry that Millie has exceeded the authority that they gave her and refuse to pay the publisher of Upmarket Businesses for the advertisement.
Requirement:
Which of the following best describes whether Upmarket Businesses can enforce the contract?
A Millie had no authority to enter into the contract.
B Millie had implied usual authority to advertise the firm’s business.
C Millie had no authority, but Upmarket Businesses was not aware of that fact.
D Millie had no authority, but Upmarket Businesses was not aware of that fact but knew that she was a partner.

Answer 60

Correct answer(s): D Millie had no authority, but Upmarket Businesses was not aware of that fact but knew that she was a partner.
The Partnership Act 1890 provides that even without authority, a partner’s usual acts for the partnership business are binding, unless the third party knows that they have no authority or does not know or believe them to be a partner.

Question 61

9 Are the following statements true or false?
An ordinary partnership may only be dissolved by the unanimous consent of the partners.
A True
B False
Where a partnership becomes insolvent, bankruptcy proceedings can be brought in respect of individual partners.
C True
D False

Answer 61

Correct answer(s): B False
This is usually expressly provided for in a partnership agreement. However, in the absence of an express provision, the Partnership Act 1890 provides that a partnership is dissolved in a number of instances, including on the death or bankruptcy of a partner.
Correct answer(s): C True

Question 62

12 Blodwin and his partner Penny want to set up a limited liability partnership (LLP) as they understand that it offers a number of advantages over an ordinary partnership. They ask you the following questions:
Requirements:
Will the LLP be liable to tax along the same lines as a registered company?
A Yes
B No
Will they need to disclose their names and addresses when they apply for registration?
C Yes
D No

Answer 62

Correct answer(s): B No
Members are taxed as individuals on the partnership’s profits.
Correct answer(s): C Yes

Question 63

13 Ashad and Michaela plan to set up a limited liability partnership (LLP) to continue the business, Jenkins & Co, that they have conducted for the past 15 years as an ordinary partnership. They particularly do not want to change the name because it is a successful business.
Requirements:
Can they register the LLP under the name Jenkins & Co?
A Yes
B No
Do they need to have a formal partnership agreement?
C Yes
D No

Answer 63

Correct answer(s): B No
They may be able to use this name as a business name, but the name of an LLP must end with the words ‘limited liability partnership’ or the abbreviation ‘LLP’.
Correct answer(s): D No
An LLP will normally have one but it is not essential.

Question 64

14 Janet and Carol have, helped by their solicitor, drawn up a formal partnership agreement for their new partnership, Bloomin Flowers LLP.
They would like answers to the following questions.
Requirements:
Can they file their partnership agreement as a means of applying to register their LLP, since it contains all the information required on incorporation?
A Yes
B No
When their business is up and running, will they need to submit confirmation statements to the Registrar of Companies?
C Yes
D No

Answer 64

Correct answer(s): B No
They must submit an incorporation document in the prescribed format.
Correct answer(s): C Yes

Question 65

16 Are the following statements true or false in relation to a limited liability partnership (LLP)?
A member of an LLP is an agent of the LLP as well as its members.
A True
B False
A member cannot bind the LLP by their actions unless they act within their actual express or implied authority.
C True
D False
LO 2c, 2j

Answer 65

Correct answer(s): B False
The Limited Liability Partnership Act 2000 provides that every member is an agent of the limited liability partnership only.
Correct answer(s): D False
Where the member acts without authority, the will still bind the LLP unless the third party knows that they do not have authority or does not know or believe them to be a member of the LLP.

Question 66

17 The business of Lush-Limos LLP has suffered badly from fewer people having extravagant weddings due to a recession and is now in a position where it is unable to meet its debts.
Requirement:
Of the following possible options that are relevant to an insolvent company, which are applicable to a limited liability partnership?
(1) Voluntary arrangement
(2) Administration
(3) Voluntary liquidation
(4) Compulsory liquidation
A All of them
B (2) and (4) only
C (3) and (4) only
D (2), (3) and (4) only

Answer 66

Correct answer(s): A All of them
They are all applicable to LLPs.

Question 67

20 Under the Limited Liability Partnerships Act 2000 certain requirements need to be met for a limited liability partnership (LLP) to be legitimately formed.
Requirements:
Are the following among those requirements?
One or more persons who are associated for the purposes of carrying on a lawful business with a view to a profit must have subscribed their names to an incorporation document.
A Yes
B No
The incorporation document must state the name of the LLP which must end with the words ‘Limited Liability Partnership’ or the abbreviation ‘LLP’.
C Yes
D No
LO 2b

Answer 67

Correct answer(s): B No
One would not be sufficient. The requirement is for two or more persons to subscribe their names to the incorporation document.
Correct answer(s): C Yes
This is also a requirement.

Question 68

21 Under the Limited Liability Partnership Regulations 2001, and in the absence of contrary provision, the rights of members of a limited liability partnership include the right to:
Requirements:
remuneration for acting in the business or management of the limited liability partnership
A Yes
B No
share equally in the profits of the limited liability partnership
C Yes
D No

Answer 68

Correct answer(s): B No
There is no statutory right to remuneration.
Correct answer(s): C Yes
In the absence of express provision, there is an implied right to share in the profits of the LLP equally.

Question 69

22 Are the following statements concerning sole traders true or false?
Before commencing business, a sole trader must obtain a licence and register for VAT.
A True
B False
All business profits accrue to the sole trader.
C True
D False

Answer 69

Correct answer(s): B False
Licences and VAT registration are only required for certain types of supply and sizes of business and so do not apply to all sole traders.
Correct answer(s): C True
The main benefit of operating as a sole trader is that all business profits accrue to the trader.

Question 70

23 Which of the following statements concerning sole traders is correct?
A A sole trader must file simplified accounts with the Registrar each year.
B A sole trader must appoint an auditor if the business’s size meets the same criteria as medium-sized companies.
C A sole trader must report the business’s finances to the tax authorities each year.
D A sole trader’s business is legally distinct from their personal wealth.
LO 2a

Answer 70

Correct answer(s): C A sole trader must report the business’s finances to the tax authorities each year.
Sole traders are not subject to audit and do not have to file accounts with the Registrar. They are required to report to the tax authorities as part of the sole trader’s personal tax return. A sole trader’s business is not legally distinct from their personal wealth – this is the main disadvantage of operating as a sole trader.

Question 71

26 Ahmed, Breda and Conway wish to form the ‘ABC’ partnership. The purpose of the partnership is to test out some business ideas and gain experience in running a business organisation.
Requirement:
Will the ABC partnership be recognised in law as a partnership?
A Yes
B No
Derek, Edith and Frankie are planning to open a bookshop. They have signed a contract to lease a business property and have already acquired a stock of books to sell. The bookshop is not due to open for two months and the shop is not expected to be profitable for six months.
Requirement:
Have Derek, Edith and Frankie formed a partnership?
C Yes
D No

Answer 71

Correct answer(s): B No
For a partnership to be recognised in law as such, it must be formed with a view to making profit. This is not the case with the ABC partnership, where the objective is to gain experience and test out ideas.
Correct answer(s): C Yes
A partnership begins when the partners agree to conduct their business activity together, which may well be before the business actually begins to trade.