General Partnerships Flashcards
What is a partnership?
Partnership comes into existence when two or more people are ‘carrying on a business in common with a view of profit’
Factors which help determine if two or more people are carrying on a business in common are:
- Do the individuals all take part in decision-making?
- Whose names are on the title deeds of any property?
- How are profits shared?
What is the one key advantage and one key disadvantage of a partnership over a limited company?
Partnerships can be started with no formalities, so they benefit from keeping information private + having less administrative and accounting requirements
The partners can be personally liable for debts as there is no separate legal personality
Why is it important/highly recommended for those seeking to enter a partnership to create a written partnership agreement?
If there is no partnership agreement, the partnership will be governed by the provisions of the Partnership Act 1890
- This doesn’t reflect modern business practices
- An oral agreement or one implied by conduct would also move away from the default position, but it is best to have it in writing
Despite a written partnership agreement being important, what Partnership Act provisions cannot be overridden?
s1 and 2, which govern when a partnership comes into existence
s5-s18 about relationships between partners and third parties + liability for debts
There are various important points to include in a written partnership agreement.
One of these relates to a commencement date. Why is this important?
A partnership begins when the definition is met, however the terms of PA will apply until the commencement date
Thereafter, the partnership agreement applies
If the partnership agreement has a fixed end date, but the partners continue working, what happens?
They are presumed to be partners on the same terms as before
Generally, all decisions made by a partnership are made by majority, except for four exceptions.
What are the four exceptions and what kind of agreement is needed?
Unanimous agreement is needed when:
- Expelling a partner (s25 PA)
- Changing the nature of the business (s24 PA)
- Introducing a new partner (s24 PA)
- Changing the terms of the partnership agreement (s19 PA)
Why is it important to record the proportions in which income profits are to be shared and how losses will be shared in a written partnership agreement?
Default under PA is that partners share in the capital, profits and losses equally and that it does not depend on the hours the partner works
Are partners entitled to a salary under the Partnership Act?
No, they are not entitled to a salary
Why is it useful to have an expulsion clause in the written partnership agreement?
By default under PA, no majority may expel another partner unless they have expressly agreed to this (s25)
- Can expel for poor performance for example
By default, they can only be expelled where even the partner who is being expelled agrees (by unanimous decision)
What is the default position under the Partnership Act with regards to dissolution of a partnership?
Any partner can end the partnership at any time by giving notice of their intention to all other partners
Notice can be with immediate effect, so partnership agreement helps to avoid this and stipulate it must be written
Under the Partnership Act, other than giving notice, what other ways does a partnership dissolve?
- When a partner retires (s 26);
- On expiry of a fixed term (s 32); or
- By the death or bankruptcy of any of the partners (s 33) (However, it is always open to the remaining partners to negotiate to buy the deceased partner’s share); or
- If the partners give notice of dissolution to a partner who has (by order of the court) granted a charge over their share of the partnership property, for a debt owed by them alone and not the partnership as a whole (s 33)
- They dissolve automatically if something happens making it unlawful for the business to continue (loss of essential licence)
S32 and s33 can be disapplied by a partnership agreement
In what situations can partners apply to court for an order that the partnership be dissolved?
If:
- A partner becomes permanently incapable of performing their part of the partnership contract;
- A partner’s conduct is calculated to be prejudicial to the business;
- A partner wilfully or persistently breaches the partnership agreement;
- The partnership can only be carried on at a loss; or
- The court thinks that, for other reasons, it is just and equitable to order that the partnership be dissolved
What is the effect of dissolution?
Dissolution means, unless the partners agree otherwise, that the partnership ends, all assets are sold and the outgoing partner gets their share; this partner can also insist on the business being sold under s39
- A partnership agreement can provide for the remaining partners to continue (partial dissolution)
- It can also allow for other partners to buy the share, or pay them it in instalments
- If the issue of payment for the share isn’t covered, they are entitled to either interest at a rate of 5% per annum on the value of the share until they receive their share or such sum as the court may order
What does the concept of ‘goodwill’ mean?
This refers to when the partnership agreement can include terms that allow time for partners to find a buyer, rather than sell the assets individually
- This allows partners to take advantage of the business’s reputation and the value of its clients/contacts
By default under the PA, how are the proceeds of sale applied if a partnership is dissolved and all assets sold?
1) Creditors of the firm must be paid in full, and partners pay from private assets if necessary
2) Partners who have lent money to the firm must be repaid the amount outstanding on the loan, including interest
3) Partners must be paid the share of the partnership’s capital to which they are entitled
4) Any surplus is shared in accordance with the partnership agreement (or equally if there is none)
If a partnership agreement adds a restraint of trade clause, how must this be limited?
Agreement can include a restraint of trade clause to restrict outgoing partners in their future business dealings
It is only enforceable if it protects a legitimate business interest and is no wider than reasonable in terms of duration/scope
What responsibilities and duties do partners have under the Partnership Act 1890?
1) Under common law, partners owe a duty of the utmost fairness and good faith towards one another. This is reflected in s28-s30 PA where partners:
- must be completely open with one another regarding any relevant information regarding the partnership;
- must account to the firm for any private profits they have earned without the other partners’ consent from any transaction concerning the partnership;
- must not compete with the firm; if the partner does so without the other partners’ consent, that partner must account for and pay over to the firm all profits made by them in that competing business.
2) Section 24 PA 1890 also provides that the partners must:
- bear a share of any loss made by the business, in accordance with the terms of their partnership agreement; and
- indemnify fellow partners who have borne more than their share of any liability or expense connected with the partnership
After ceasing to be a partner for partnership A, can a partner work for a competing partnership B?
Under the PA, there is nothing which prohibits a partner from working for a competing business
Under the PA, are partners considered employees and must they devote the majority of the time to the partnership?
No obligation under PA to work full time and they aren’t considered employees so don’t get statutory rights to time off for ill health or injury
Give an overview of the position of the partnership’s liability in relation to third parties
Can be liable from a contract made by one or all partners
S6 PA – firm is bound by any contract entered into by partners in the firm’s name, provided the partner’s actions were authorised by the partners, either by acting jointly in making the contract or with express/implied authority from the others
- Implied authority can arise through a course of dealing (what’s normally done)
- To be implied, it should be often, regular and be happening presently
The partnership firm may be liable to third parties when a partner enters a contract with ‘apparent authority.’ When will this apply?
Firm may be liable for actions which weren’t actually authorised but where they had apparent authority; ie if the following four conditions are met (s5 PA):
1) the transaction is one which relates to business of the kind carried on by the firm; - objective
- Consider whether what is bought relates to the business (office chair vs yacht for insurance company)
2) the transaction is one for which a partner in such a firm would usually be expected to have the authority to act; - objective
- Consider the value of the transaction and whether you’d expect one person to sign off on it (office chair vs office building)
3) the other party to the transaction did not know that the partner did not have authority to act; and – subjective (based on knowledge of 3rd party)
4) the other party deals with a person whom they know or believe to be a partner – subjective
Where a partner acts with apparent authority, they bind the firm to the contract. What must the partner acting with apparent authority then do?
Partner has to indemnify the others for loss as they breached the agreement by acting without actual authority
S10 PA – firm is liable for any wrongful act or omission of a partner who acts in the ordinary course of the firm’s business or with the authority of their partners
Partners have unlimited liability for debts, given that there is no concept of separate legal personality.
How exactly are partners liable for debts before leaving a partnership?
Partners are jointly and severally liable for debts (Civil Liability (Contribution) Act 1978)
Defendant partner may seek a contribution from any of the others
