Chapter 9 - 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? Anlayse this definition further

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 is a parnership deed?

Answer 5

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

Question 6

Is a partnership deed required? What applies instead?

Answer 6

A parnership 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 7

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

Answer 7

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 8

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

Answer 8

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 9

What does the Partnership Act dictate regarding management in a partnership?

Answer 9

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 10

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

Answer 10

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

Question 11

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

Answer 11

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

Question 12

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

Answer 12

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

Question 13

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

Answer 13

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 14

What does the Partnership Act dictate regarding remuneration in a partnership?

Answer 14

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

Question 15

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

Answer 15

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

Question 16

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

Answer 16

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

Question 17

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

Answer 17

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 18

What does the Partnership Act dictate regarding dissolution of a partnership?

Answer 18

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 19

Explain the liability position of the partners in an ordianry partnership

Answer 19

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 20

Partners’ liability and authority.

Answer 20

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.