Chapter 6 - Sole traders and partnerships

Question 1

What are the different types of traders we will look at?

Answer 1

• sole traders
• partnerships (ordinary and limited liability)
• companies

Question 2

What is a sole trader?

Answer 2

A person who owns and run a business. They provide the capital and earn the profits or suffer the losses of the business. They may have employees. The business is not a separate legal entity to the owner.

Question 3

What are the advantages (4) and disadvantages (5) of being a sole trader?

Answer 3

Question 4

What is a partnership?

Answer 4

A partnership is ‘the relation which subsists between persons carrying on a business in common with a view of profit’ (s 1 Partnership Act 1890).

Question 5

What are the two types of partnerships?

Answer 5

• ordinary
• limited liability partnership

Question 6

What is a parnership agreement?

Answer 6

A formal partnership deed sets out the terms of the agreement between the partners

Question 7

Is a partnership agreement required for ordinary partnerships? What applies instead?

Answer 7

For ordianry partnerships a parnership agreement (or deed) is not required

Where there is no express agreement the basic rights and duties of the partners described in the Partnership Act 1890 will apply.

Question 8

What does the Partnership Act dictate regarding profit and losses in an ordinary partnership?

Answer 8

These are shared equally in the absence of contrary agreement. If the partnership agreement states that profits are to be shared in certain proportions but is silent as to losses, then losses are to be shared in the same proportions.

Question 9

What does the Partnership Act dictate regarding capital deficiency in an ordinary partnership?

Answer 9

The remaining partners share a capital deficiency (what a partnership owes but cannot pay back) not as a loss but in ratio to the amounts of capital which they originally contributed to the firm.

Question 10

What does the Partnership Act dictate regarding management in an ordinary partnership?

Answer 10

Every partner is entitled to take part in managing the firm’s business; ordinary management decisions can be made by a majority of partners

Question 11

What does the Partnership Act dictate regarding a change in business in an ordinary partnership?

Answer 11

Any decision on changing the nature of the partnership’s business must be unanimous.

Question 12

What does the Partnership Act dictate regarding new partners in an ordinary partnership?

Answer 12

New partners must only be introduced with the unanimous consent of existing partners.

Question 13

What does the Partnership Act dictate regarding variation in the partnership agreement in an ordinary partnership?

Answer 13

The partnership agreement may be varied with the consent of all the partners

Question 14

What does the Partnership Act dictate regarding indemnity (security or protection against a financial liability) in an ordinary partnership?

Answer 14

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.

Question 15

What does the Partnership Act dictate regarding remuneration in an ordinary partnership?

Answer 15

No partner is entitled to remuneration for acting in the partnership business.

Question 16

What does the Partnership Act dictate regarding interest on capital in an ordinary partnership?

Answer 16

None is paid on capital except by agreement. However, a partner is entitled to 5% interest on advances beyond his original capital.

Question 17

hat does the Partnership Act dictate regarding records and accounts in an ordinary partnership?

Answer 17

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

Question 18

What does the Partnership Act dictate regarding expulsion of partners in an ordinary partnership?

Answer 18

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.

Question 19

What does the Partnership Act dictate regarding dissolution of an ordinary partnership?

Answer 19

The authority of the partners after dissolution continues so far as is necessary to wind up the partnership affairs and complete transactions already begun.

On dissolution, any partner can insist on realisation of the firm’s assets, payment of the firm’s debts and distribution of the surplus.

Question 20

In addition to the Partnership Act, what other duties do partners owe to the partnership?

Answer 20

In addition partners owe fiduciary duties to the partnership.
These duties are:
* Act in good faith
* Not to exercise a legal right (e.g. to expel a partner) for an improper motive
* Not to keep profits derived from the partnership without the consent of the other partners
* To avoid conflicts of interest without full disclosure

Question 21

Explain the liability position of the partners in an ordinary partnership with regards to the other partners

Answer 21

Partners are jointly and severally liable for the acts of their fellow partners in so far as they bind the firm.

Therefore, the firm and the partners will be bound by all partners’ acts for carrying on in the usual way business of the kind carried on by the firm unless:

1. they have no authority to act for the firm in the particular matter; and
2. the person with whom they are dealing either knows that they have no authority or does not know or believe them to be a partner.
3. a partner pledges the credit of the firm for a purpose which has no apparent connection with the firm’s ordinary business, the firm will not be bound unless he has actual express authority to do so

Question 22

What is the liability position for a partner for debts incurred: i) before they joined the firm, ii) whilst being a parner iii) after they leave the firm

Answer 22

A partner’s liability depends upon the date when the debts were incurred and the perception of the third party.

i) a new partner admitted to an existing firm is liable for debts incurred only after he becomes a partner - they would not be liable for debts incurred before they joined the partnership

ii) The partner is liable for the debts incurred whilst he is a partner even after he has left the firm. However, he may agree with his continuing partners that they should indemnify him for these debts or he may negotiate a release with the creditor.

iii) they would be liable for debts of the firm incurred after his retirement if the creditor knew him to be a partner (before retirement) and has not had notice of his retirement. Therefore, it is vital on retirement that a partner gives notice to all the creditors of the firm.

Question 23

Under what conditions does the Partnership Act consider an ordinary partnership to be dissolved?

Answer 23

• The death or bankruptcy of a partner (although it is usual for the partnership agreement to override this)
• Expiry of a fixed term partnership
• Completion or termination of a single joint venture (if applicable)
• Subsequent illegality - trade becomes illegal (i.e. vapes)
• Notice given by a partner if it is a partnership of indefinite duration
• Order of the court (i.e. where it is deemed just and equitable to do so)

Question 24

What is a limited liability partnership (LLP)?

Answer 24

A limited liability partnership (LLP) is a partnership that limits the personal liability of its members for the business’s debts - have some characteristics of corporations

Question 25

What is required for the formation of a limited liability partnership (LLP)?

Answer 25

An incorporation document signed by two members and a registration fee

Question 26

What information must be included in an incorporation document for an LLP? (5)

Answer 26

* The name of the LLP (which must end with the words Limited Liability Partnership or the abbreviation LLP) * The location of its registered office (England and Wales or Wales) * The address of its registered office * The names and addresses of all the members of the LLP * The names of the two designated members who are to be responsible for signing notices and accounts and delivering them to the registrar

Question 27

Is a partnership agreement required for limited liability partnerships? What applies instead?

Answer 27

An LLP is not required to have (but normally will have) a formal partnership agreement dealing with matters of internal regulation and duties owed by the partners to each other. In the absence of any express agreement to the contrary, the provisions of the Limited Liability Partnerships Act 2000 and the Limited Liability Partnerships Regulations 2001 (as amended) will apply.

Question 28

What are the key regulations for an LLP?

Answer 28

* An LLP must keep and retain accounting records, to prepare and publish annual accounts and to have them audited like a company (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 charges and to register charges with the Registrar * To notify the Registrar of any change to membership, designated members 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 the Registrar. As in the case of companies, the members 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 fraudulent or wrongful trading or liable to disqualification in the same way as a director of a company.

Question 29

What authority does the Limited Liability Partnerships Act give to partners of an LLP?

Answer 29

The Act provides that each member is an agent of the LLP and therefore has the power to bind the LLP by his acts unless: * The member does not have authority * The third party is aware that he does not have authority or does not know or believe him to be a member of the LLP.

Question 30

DISSOLUTION OF AN LLP