General Partnerships

Question 1

What governs General Partnerships?

Answer 1

Partnership Act 1890 - two or more persons carrying out business in common with a view to profit

Question 2

Are any formalities required?

Answer 2

No

Question 3

What is prima facie evidence of a partnership?

Answer 3

Receipt of profits - does not apply to losses

Question 4

What circumstances do not create a partnership?

Answer 4

Mere fact that two or more people jointly own property does not in itself create a partnership, even if they agree to share profits from the property

Question 5

Is a contribution required?

Answer 5

No

Question 6

Is there a limit on the number of partners?

Answer 6

No

Question 7

What two types of authority are there?

Answer 7

Actual

Apparent (ostensible)

Question 8

What is actual authority?

Answer 8

A firm will be bound by any act:

Done in a way showing an intention to bind the firm,

By any person actually authorised by the firm to undertake the act

(Courts also recognise implied actual authority if the partners have allowed a partner without express actual authority to regularly do an act.)

Question 9

What is apparent authority?

Answer 9

The act of a partner carrying on in the usual way of business of the kind carried out by the firm will bind the firm and the other partners unless:

The partner had no authority to act; and

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

Question 10

Is notice from a third party valid?

Answer 10

If a third party gives notice to a partner who habitually acts in the partnership business, the notice will be considered to be notice to the firm

Question 11

What happens if the partner doesn’t have actual or apparent authority?

Answer 11

The partner is personally liable to the third party

Question 12

How does liability for debts and wrongdoing operate?

Answer 12

Unlimited personal liability

Liability is joint

Question 13

How does liability operate in relation to an incoming partner?

Answer 13

Not liable to creditors for anything entered into before joining the partnership

Question 14

How does liability operate in relation to outgoing partners before retirement?

Answer 14

If a partner leaves a firm and the firm continues, the outgoing/retiring partner remains liable for any debts or obligations incurred before the partner leaves

The retiring partner and the continuing firm can agree that the partner will not be liable to the firm for these obligations

Question 15

How does liability operate in relation to outgoing partners after retirement?

Answer 15

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

Must give notice of retirement — Actual notice should be given to existing creditors and notice by way of advertisement in the London Gazette is required for new customers

Question 16

What is holding out?

Answer 16

A person who holds themselves out as a partner of a firm even though the person is not actually a partner, 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 holding out

Can apply to retiring partners if they don’t give sufficient notice

Question 17

What is partnership property?

Answer 17

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

It cannot be used to satisfy an individual partners debt

Question 18

How does profit operate?

Answer 18

Equally and not until dissolution unless agreed otherwise

Question 19

Can profits be assigned?

Answer 19

Yes

Question 20

What is the default position regarding management?

Answer 20

One partner = one vote

Partners are free to agree otherwise

Question 21

What are the individual partners’ duties?

Answer 21

Fiduciary duty to each other under common law

Duty to account for secret profits

Duty to disclose information

Question 22

Dissolution without court involvement

Answer 22

By expiration

By notice

Bankruptcy, death, or charge

Illegality

Question 23

Dissolution with court involvement

Answer 23

Permanent Incapacity — Provisions of the Mental Capacity Act 2005

Prejudicial Conduct

Wilful or persistent breaches of Partnership Agreement

When Business can be carried on only at a Loss

Just and equitable basis

Question 24

How does dissolution effect partner authority?

Answer 24

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—not withstanding the dissolution—in order to wind up the partnership and to complete transactions begun but unfinished at the time of the dissolution

Question 25

How does dissolution effect distribution of partnership property?

Answer 25

After dissolution, partnership assets will first be used to pay off the partnership’s debts

If assets still remain after repaying contributions, they will be divided among the partners in the same proportion as profits

Note: 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 profits

Question 26

How are general partnerships taxed?

Answer 26

Taxation of partners is covered by the Income Tax Act 2007

Each individual partner must include their personal income of their share of the profit made by the partnership, whether or not the profit was distributed to the partner