General Partnership

Question 1

3

FORMATION

Answer 1

(1) two or more persons must
(2) carry on a business in common
(3) with the intention to make a proft.

Question 2

Persons

Answer 2

The term ‘persons’ is not limited to natural persons but also
includes other business entities such as a company.

Question 3

2

Business in Common

Answer 3

The term ‘business in common’ actually comprises two separate ideas: ‘business’ and ‘in common’.
1. For our purposes, ‘business’ is buying or selling goods or providing services for a fee.
For example, operating a clothing store is a business, as is operating a law frm.
2. The term ‘in common’ goes to the idea that the people conducting the business are operating it together—they each have a right to make decisions about the business, share in its gains, and the like

Question 4

3

Intention to Proft

Answer 4

1. it is the intention to make a proft that matters; the fact the business never actually makes a proft does not prevent it from being a partnership.
2. It should also be noted that the parties need not have an intention to form a partnership;
3. the only intention required is the intention to carry on togeth-er a business for proft.

Question 5

No Formalities Required

Answer 5

1.Notice that there is no requirement of a written partnership agreement to create a partnership
2.nothing need be filed with Companies House.

Question 6

3

Receipt of Share of Profts Prima Facie
Evidence of Partnership

Answer 6

1. Sometimes it is unclear whether a partnership has been formed.
   In these cases, courts will look to the circumstances to determine whether it appeared the parties intended to
   carry on** a business in common**.
2. Under the Partnership Act, if a party receives a share of the profts of a business, that gen-erally is treated as prima facie evidence that a partnership exists.
3. However, this presumption does not apply if:
   *The receipt constitutes a repayment of debt;
   *The receipt constitutes remuneration (payment) of an
   employee or an agent (for example, the owner of a sandwich shop might agree to pay the shop’s manager 10% of the profts—this in itself does not make the manager a partner); or
   *The receipt constitutes an annuity to a survivor of a partner on account of a partner’s share of the profts or to a person who has sold the **goodwill **of the business.

Question 7

Agreement Regarding Losses

Answer 7

Note that while an agreement to share losses might be some proof of an intention to form a partnership, it is not prima facie evidence. More importantly, a lack of such an agreement does not prevent the formation of a partnership.

Question 8

Circumstances Not Creating a Partnership

Answer 8

1. Under the Partnership Act, the mere fact that two or more people** jointly own property** does not in itself create a part-nership, even if they agree to share profts from the property.
2. Similarly, the sharing of gross returns does not of itself create a partnership.
   EXAMPLE
   Review the example in which Arthur and Gwen agreed to purchase a used Lotus together. Assume they purchase it jointly, take turns driving it for a year, and decide to move on to a diferent car—a used Ferrari. Because of market condi-tions, the price of the Lotus has increased and they are able to sell it at a proft—each taking their share. They still are not partners, as they did not operate a business.

Question 9

Contribution Not Required

Answer 9

Partners often contribute money or property to the partner-
ship, but a partner is not required to make any contribution

Question 10

No Limit on Number of Partners

Answer 10

There is no legal limit on the number of partners that can be in a partnership.

Question 11

NO SEPARATE LEGAL PERSONALITY

Answer 11

Again, unlike a company or an LLP, a partnership does not
have a separate legal personality from its owners. Therefore, the partners in a partnership have unlimited personal liability for the debts of the partnership.

Question 12

AUTHORITY TO BIND THE FIRM

Answer 12

1. The Partnership Act contains many provisions that deal with the relationship between the partners and how the partner-ship should be run.
2. However, most Partnership Act rules ap-ply** only if** the partners have not agreed otherwise
3. (that is, it is open to the partners to override or supplement the terms of **the Partnership Act with a contractual partnership agreement, but they are not obliged to do so).

Question 13

Authority of Partners to Bind the Firm
The rules governing this issue are set out in the Partnership Act and are based on the principles of Agency law, as the Partnership Act provides that **every partner in a partnership is an agent of the firm **and the other partners. Under Agency law, an agent can bind a prin-cipal (in this case, the frm) only if the agent acts with author-ity. The Partnership Act provides for two types of authority:

Answer 13

actual authority and apparent or ostensible authority.

Question 14

4

Actual Authority
Under the Partnership Act, a firm will be bound by any actDone in a way showing an intention to bind the firm:

Answer 14

Done in a way showing an intention to bind the firm
1. By any person actually authorised by the frm to undertake the act.
2. Partnerships often have partnership agreements giving certain partners specifc powers and responsibilities. That would be a grant of actual authority.
3. Alternatively, the partners could vote to give a particular partner actual authority to do a specifc kind of act.
4. Courts also recognise** implied actual authority **if the partners have allowed a partner without express actual authority to regularly do an act.

Question 15

3

Apparent or Ostensible Authority

Answer 15

The Partnership Act also provides that the act of a partner carrying on **in the usual way business **of the kind carried on by the firm will bind the firm and the other partners unless:
1. The partner had no authority to act, and
2. The person with whom the partner was dealing either:
(1) knew the partner had no authority to act, or
(2) did not know or believe the person they were dealing with was a partner.

3. In determining whether an act is carrying on in the usual way business of the kind carried on by the form, the test is objective: would a reasonable third party think a business of this kind would usually do this act, and what authority would a reasonable third party expect a partner in such a firm to have?
   EXAMPLE
   A and B formed a partnership to run a garage. They entered a partnership agreement expressly stating that the partnership will not buy and sell cars. Subsequently A agrees to buy a car from C. Because buying cars is business of the kind that a third party would usually expect to be carried on by a firm running a garage, the contract for the purchase of the car would be held to be within the apparent authority of A and, therefore, binding on the frm. (As we will discuss lat-er, B could, however, sue A for damages arising from breach of the partnership agreement.)

Question 16

4

Case law has also shown that third parties can assume that part-
ners have authority to:

Answer 16

• **Buy and sell **firm goods;
• *Receive** debt **payments due to the firm;
• *Hire employees; and
• *Employ a solicitor to act for the firm.

Notice
Relatedly, if a third party gives notice (for example, a notice by a tenant to continue a lease) to a partner who
habitually acts in the partnership business, the notice will be considered to be notice to the firm (except, of course, in cases in which the third party and partner have joined to commit a fraud on the frm).

Exam Tip
It is very important to remember that as agents of the partnership, partners have apparent authority to bind the partnership to any contract within the scope of the partnership business. If a contract is outside the scope of partnership business, the partnership generally will not be bound unless the partner** has actual authority**.

Question 17

2

Only Partner Bound If No Authority

Answer 17

1. If a partner enters into a contract with a third party and does not have authority, that partner, and only that partner will** be personally liable** to the third party (technically, not on the contract but rather for breach of a warranty of authority, based on the principles of agency).
2. This is because the part-ner, by purporting to enter into a contract with the third party on behalf of the partnership, warrants (that is,promises), that they have the authority to do so.

Question 18

2

Liability for Debts and Wrongdoing

Answer 18

1. Partners have unlimited personal liability for the debts of the partnership if the partnership itself is unable to pay its debts out of partnership property. This liability is joint, that is, a creditor can choose to pursue one or all of the partners for their debt.
2. Partners are similarly liable for** torts.** Where any partner acting in the ordinary course of the business (or with the authority of the other partners) of the partnership com-mits a tort, the partnership is liable to the same extent as the partner, and the partners’ liability is joint and several.

Question 19

3

Incoming Partners

Answer 19

1. The Partnership Act provides that an incoming partner will not become liable to the creditors of the partnership for anything done before they become a partner. (Of course, the incoming partner and the current partners may come to a contractual agreement otherwise.)
2. Note:** No** new partner may be added to a partnership without the consent of all existing partners.
3. And note: Partners do not have the power to expel another partner unless that power has been** expressly agreed to by the partners **(for example, in the partnership agreement).

Question 20

2

Outgoing Partners—Debts Incurred Before
Retirement

Answer 20

1. If a partner leaves a firm and the frm continues, the outgoing/retiring partner remains liable for any debts or obligations incurred before the partner leaves
2. The retiring partner and the continuing firm can agree that the partner will** not be liable** to the frm for these obligations (for example, by execut-ing a** release or a ‘hold harmless agreement’ under which the firm agrees to indemnify the retiring partner for liabilities), but such an agreement has no effect on the retiring partner’s direct liability to third parties unless the third party also agrees (a ‘novation’**).

EXAMPLE
A and B are partners in a garage. B decides to leave the firm, but the parties agree that C will become a new partner in B’s place. Shortly before B left the firm, they purchased an expensive, new diagnostic computer for the garage from Vendor and arranged to pay for it over time. B would remain liable for the payments to Vendor after leaving the firm unless A, B, C, and Vendor agree that C will take B’s place under the debt.

Question 21

4

Outgoing Partners—Debts Incurred After
Retirement

Answer 21

1. If a person deals with a firm after a change in its membership, they are entitled to treat all apparent partners of the old firm as still being partners of the firm until notice of the change has been received.
2. Therefore, to discharge themselves from liability for future debts of the frm, a retiring partner needs to** give notice of their retirement.**
3. **Actual **notice should be given
   to existing creditors and notice by way of an advertisement in the London Gazette is required for new customers
4. If a partner retires and they were not known to a person dealing with the partnership to have been a partner, that retir-ing partner will not be liable for partnership debts contracted with that person after the date of their retirement.

Question 22

3

HOLDING OUT

Answer 22

1.If a person holds themselves out as a partner of a fIrm even though the person is not actually a partner, they may be held** liable as if they were a partner** to any third party who has given credit to the partnership on the strength of the hold-ing out.

2. ‘Holding out’ can apply to retiring partners if they have not given proper notice to existing and new customers, and if they have failed to ensure that their name is removed from any notices, websites, or stationery.
3. The same rule applies if a person knowingly allows another to hold the person out as a partner.

Question 23

5

PARTNERSHIP PROPERTY

When a partnership is formed, the partners typically will provide money to allow the frm to begin doing business, but sometimes they will supply other property to the fIrm, such as equipment or premises.

In such cases, it is important to
establish whether the property being used by the partnership belongs to the partnership or remains in the ownership of individual partners, as this will afFect how such property is treated on the dissolution of the partnership.

Answer 23

1. Property belonging to a partner individually will, of course, remain that partner’s property after dissolution of
   the fIrm.
2. Property given by a partner to the fIrm becomes partnership property and constitutes a capital contribution to the firm by the partner (capital accounts are kept for each partner to keep track of the partner’s share of contributions, profts, and losses).
3. The Partnership Act provides that partnership property is property originally brought into the partnership or acquired for partnership purposes and in the course of the partnership business.
4. Unless a contrary intention appears, property bought with** money belonging to the firm** is partnership property, and property titled in the firm name is partnership property.
5. Partnership property must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.

Question 24

2

Unavailable for Partner’s Separate Debt

Answer 24

1. Creditors of an individual partner (as opposed to creditors of the firm) have no right to seek execution on partnership property to satisfy the separate debt of the partner.
2. However, such creditors may ask a court to make an order charging the partner’s interest in the firm

Question 25

Division of Capital and Profts—Shared Equally

Answer 25

1. In the** absence** of any provision in the partnership agreement to the contrary, capital and profts are shared equally amo**ng the partners.
2. So if partners contribute unequal shares at the outset of the partnership and want to share in any profts pro rata to their capital contributions, this would need to be spec-ifed in the partnership agreement.

Question 26

.No Right to Distribution Before Dissolution Except as Agreed

Answer 26

Partners do not have any right to a distribution of the firm’s proft and capital before dissolution except as agreed by the partners

Question 27

3

Right Assignable

Answer 27

1. A partner’s right to a share of the profts is assignable,
   2.but the assignment does not entitle the assignee to participate in, or interfere with, management of the firm.
   3.Neither does it make the assignee liable for the frm’s obligations.

Question 28

2

Division of Losses—Typically Shared Like
Profts

Answer 28

1. The partners must also contribute equally to the losses of
   the partnership, whether capital or otherwise, unless there is a provision in the partnership agreement that states otherwise
2. otherwise. However, if profts are shared unequally by virtue of a provision in the partnership agreement, on dissolution,any remaining losses will be paid by the partners in the pro-portion in which they were entitled to share profts.

Question 29

Partnership Books

Answer 29

All of the rules above regarding rights to profts, liabilities for losses, and the like might make you wonder—how do the partners know what they are due and what they owe?

The partnership is required to keep its books at its place of business (or principal place of business if there is more than one), and each partner has a right to inspect and copy them as the partner sees ft.

Question 30

Interest

Answer 30

A partner is** not entitled** to interest on their capital contribution, but is entitled to interest on any loan made to the partnership at a rate of** 5%** per annum.

Question 31

2

Remuneration

Answer 31

1. A partner is not entitled to remuneration for acting in the partnership business (that is, a partner is not entitled to be paid for performing work for the partnership).
2. The partnership agreement may, however, contain provisions that deal with the situation whereby certain partners manage the business and get paid a salary, as opposed to sleeping partners who are merely investors and take no active part in the day-to-day running of the business.

Question 32

3

PARTNERSHIP MANAGEMENT

Answer 32

1. The Partnership Act provides that every partner has an** equal right** to take part in the management of the frm business.
2. As with other provisions of the Act, partners are free to agree otherwise, and it is common for a partnership agreement to assign different roles and powers to the partners, ranging from active management to a sleeping partner in a pure in-vestment role.
3. However, unless a partnership agreement has such provisions, the basic rule is one partner, one vote.

Question 33

3

Approval of Decisions

Answer 33

1. Typically, management decisions in a partnership are made by a simple majority vote unless the partnership agreement provides otherwise.
2. However, the following require a unanimous vote of all existing partners:
   *Admission of a new partner;
   *A change in the nature of the partnership business; and
   *An alteration to the partnership agreement.
3. Recall that a majority of the partners cannot expel another partner from the firm unless an express agreement to do so has been agreed between all the partners.

Question 34

3

DUTIES OFTHE PARTNERS

Answer 34

1. Fiduciary Duty
2. Duty to Disclose Information
3. Duty to Account for Secret Profots

Question 35

2

Fiduciary Duty

Answer 35

1. Under common law, partners in a partnership are under a fiduciary duty to each other, that is, they are required to act in good faith and to exercise their powers for the beneft of the partnership as a whole.
2. A fiduciary relationship is a relationship of trust andconfdence.

EXAMPLE
A clause in a partnership agreement allowed a 2/3rds major-ity of partners in a firm to expel a partner and to purchase his share at a value set out in the partnership agreement which did not take account of future profits. If the majority did so with the sole aim of obtaining the partner’s share in
the partnership at a low cost, this would be a breach of the duty of good faith required by virtue of their fiduciary relationship to each other.

Question 36

Duty to Disclose Information

Answer 36

Partners are under a duty to disclose information on all things affecting the partnership to any partner or their legal representatives.

Question 37

2

Duty to Account for Secret Profits

Answer 37

1. Every partner must account to the partnership for any proft or beneft obtained without the consent of the other partners from any transaction** concerning the partnership**, or from any use by the partner of the partnership property or the partnership name.

1) A, B, and C are partners in an auto repair garage. An acquaintance of B asks B to repair his car. B tells the acquaintance to bring the car to the shop after hours and he will fix it personally. B fixes the car as promised and the acquaintance pays B £500 for the work. B must account to the partnership for the £500—that is, the £500 belongs to the partnership and not to B personally.
2) A and B operate a grocery store as partners. A baker tells B that if he will purchase baked goods for the store from her, she will pay B a ‘personal commission’ of 5% on purchases. The 5% commission belongs to the partnership and not to B—he has a duty to account to the partnership for it.

Question 38

Account for Profts of a Competing Business

Answer 38

If a partner, without the consent of the other partners, carries on any business in competition with that of the partnership,
they must account to the partnership for all profts they made in that business.

Question 39

2

TERMINATION OF THE PARTNERSHIP

Answer 39

1. Unlike a limited company or a limited liability partnership, a general partnership cannot exist perpetually.
2. It has no existence separate from its owners, so technically if there is a change in the partners, this effectively brings the partnership to an end—it is dissolved. (Often, the business will actually continue, but it technically is a new partnership as the membership has changed.)

Question 40

2

Dissolution can arise in a number of ways:

Answer 40

1. Dissolution Without Court Involvement
   a. Dissolution by Expiration
   b.Dissolution by Notice in Partnership at Will
   c.Dissolution by Bankruptcy, Death, or Charge
   d.Dissolution Due to Illegality
2. Dissolution byWay of a Court Order
   a.Permanent Incapacity
   b.Prejudicial Conduct
   c.Wilful or Persistent Breaches of Partnership Agreement
   d.When Business Can Be Carried on Only at a Loss
   e.Just and Equitable Basis

Question 41

2

Dissolution by Expiration

Answer 41

1. If the partnership agreement provides the partnership will be for a certain term, it is dissolved upon the expiry of theterm.
2. Similarly, if it was set up for a specific enterprise, it willbe dissolved by the completion or termination of that enterprise.

Question 42

2

Dissolution by Notice in Partnership at Will

Answer 42

1. If a partnership was not set up for a fixed term, any partner can give notice to the other partners of their intention to dis-solve the partnership.
2. Dissolution will take place on the date set out in the notice or, if there is no such date, from the date of the communication of the notice.

Question 43

Dissolution by Bankruptcy, Death, or Charge

Answer 43

A partnership is dissolved by the death or bankruptcy of
any partner.

Question 44

Dissolution Due to Illegality

Answer 44

A partnership will be dissolved if an event occurs which makes it unlawful for the business of the partnership to be carried on or for the partners to carry it on in partnership.
Unlike the provisions in a.-c., above, this provision cannot be modifed by the partnership agreement.

EXAMPLE
It is a legal requirement for solicitors to have a practising certifcate in order for them to practise. Failure by a partner
in a law firm to renew a practising certifcate would mean that the partnership would be illegal.

Question 45

Dissolution by Way of a Court Order

Answer 45

1. The provisions of the Mental Capacity Act 2005 will operate to dissolve any partnership where the court considers that a partner does not have mental capacity.
2. Under the provisions of the Partnership Act, a partner can also apply to court for an order that the partnership be dissolved

Question 46

Permanent Incapacity

Answer 46

If a partner becomes permanently incapable of performing their part of the partnership contract, the other partner(s) may apply to a court for dissolution.

Question 47

Prejudicial Conduct

Answer 47

If a partner has been guilty of conduct that would** prejudicially affect** the carrying on of the business, with regard being had to the nature of the business, a partner may apply to a court for dissolution.

Question 48

Wilful or Persistent Breaches of Partnership
Agreement

Answer 48

1. If a partner wilfully or persistently breaches the partnership agreement, or otherwise conducts themselves in a way that means it is not** reasonably practicable** for the other partners to carry on in partnership with them (for example, wilful or persistent breaches of trust and confdence), the other partner(s) may apply to a court for dissolution.

Question 49

When Business Can Be Carried on Only at a Loss

Answer 49

Because the Partnership Act defines a partnership as a business carried on ‘…with a view of proft’, if the partnership can be carried on only at a loss, it follows that it should be dissolved.

Question 50

2

Just and Equitable Basis

Answer 50

1. If circumstances have arisen which mean it is just and equitable for the partnership to be dissolved, a court may dis-solve the partnership.
2. This ground is often used in deadlock situations, that is, where there are fundamental differences of opinion between the partners and they cannot agree on a way forward.

Question 51

Effect of Dissolution
a.Partner Authority

Answer 51

After dissolution of a partnership, the authority of each partner to bind the firm, and the other rights and obligations of the partners, will continue—notwithstanding the dissolution—in order to wind up the partnership and to complete transactions begun but unfinished at the time of the dissolution.

Question 52

4

Effect of Dissolution
b.Distribution of Partnership Property
After dissolution, partnership assets will first be used to pay of the partnership’s debts.

Answer 52

1. If the assets are insufficient to pay creditors, the partners are personally liable for any shortfall.
2. If the assets are sufficient to pay creditors, any assets remaining will be used first to repay any** advances** any partner has made to the firm (that is, to repay any loans a partner made to the partnership).
3. If assets remain after loans are repaid, they are used to return the partners’ contributions (if they have not already been repaid).
4. If assets still remain after repaying contributions, they will be divided among the partners in the same proportion as profts (equally, absent a provision in the partnership
   agreement).

Note: The Partnership Act states that losses shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profts.

Question 53

TAXATION

Answer 53

1. Taxation of partners is governed by the Income Tax Act 2007.
2. Each year, each individual partner must include in their personal income their share of the profit made by the partnership, whether or not the proft was distributed to the partner.
   The income will be taxed at the appropriate rate for that partner.