General Partnerships

Question 1

what is a partnership?

Answer 1

a partnership comes into existence when two or more persons are carrying on a business in common with a view of profit

partners can be individual or companies

partnership does not have a separate legal personality

Question 2

rules for determining the existence of a partnership

Answer 2

factors to determine existence of a partnership:

• do the individuals all take part in the decision making?
• whose names are on the title deeds of any property?
• how are profits shared?

Question 3

default partnership contract

Answer 3

partnerships are governed by the Partnership Agreement 1890

this contract governs the relationship between the partners, unless they have agreed any specific terms, which will usually override the default provisions

Question 4

PA 1890 provisions can be overriden

Answer 4

partners are likely to enter into a partnership agreement, and its terms will override many of the provisions in PA

SOME SECTIONS CANNOT BE OVERRIDEN -:
ss 1&2 - govern when a partnership comes into existence
ss 5-18 - cover the relationship between the partners and third parties, particularly liability for debts

Question 5

why operate as a partnership?

Answer 5

• can be started with no formality
• must adhere to extensive admin and accounting requirements (do not have to make this public)
• do not have to enter into a written agreement if they choose not to
• possible tax advantages

Question 6

starting a partnership

Answer 6

no formalities required

partners must be aware of the default terms which govern the relationship between them, if they don’t make alternative provisions

written agreement -: including contractual terms which reflect the way the partnership will be run & distribution of the partnership wealth

Question 7

partnership agreement clauses:

Answer 7

• name of the partnership
• place and nature of business
• commencement and duration
• work input
• roles
• decision making
• financial input
• shares in income and capital profits and losses
• drawings and salaries
• ownership of assets
• expulsion
• dissolution
• goodwill
• distribution of proceeds of sale
• restraint of trade
• dispute resolution

Question 8

partnership agreement - commencement and duration

Answer 8

partnership begins when the definition in s1 PA is satisfied

insert a date - clear when it is believed that the particular rights, responsibilities, and obligations will commence

if partners begin to work on partnership business before this date, partnership may come into existence on the earlier date

some partnership agreements are fixed term - it will be clear from the terms of the contract when the partners expect the partnership to end

Question 9

partnership agreement - work input

Answer 9

partners may take part in the management of the business

a common clause in a partnership agreement is to state that a partner must devote the whole of their time and attention to the business

non-complete clauses are common

Question 10

partnership agreement - roles

Answer 10

sets out each partners role

sometimes there may be restrictions on what partners are allowed to do

if a partner breaches a restriction setting out the scope of their authority, they will be in breach of the partnership agreement

failure to carry out their duties as set out in the agreement may be a reason for expulsion

Question 11

partnership agreement - decision making

Answer 11

all decisions in a partnership must be taken by a majority

exemptions to this rule:
- changing the nature of the business
- introducing a new partner
- changing the terms of the partnership agreement
(can only be made unanimously)

Question 12

partnership agreement - financial input

Answer 12

the agreement should set out the amount of the partners’ initial capital contributions and whether they will be obliged to contribute more capital in the future

Question 13

partnership agreement - shares in income and capital profits and losses

Answer 13

partners share equally in the capital and profits of the business

income profits - profits that are recurring in nature (trading profit)
capital profits - one off gains (building increasing in value)

often, if the parties have contributed different amounts to the partnerships capital, they will decide that they should own the partnership capital in those same proportions

they will also need to decide whether they should own any capital profits in the same proportions as their initial contributions

the agreement might provide for interest to be paid on capital contributions, to encourage investment and to reward the partners for contributing capital to the partnership

often the partners share of income profits will depend on their working hours - a partner who spends more time working for the partnership will take more of the income profits
(if the partners do not agree how they will share income profits, under the PA 1890, they are deemed to share them equally)

the default provision is that the partners will share losses equally

Question 14

partnership agreement - ownership of assets

Answer 14

buildings and land will all have title deeds showing the legal owners of the property (although there may be a dispute as to who the beneficial owners are)

other assets, such as stock and machinery, will not

Question 15

partnership agreement - expulsion

Answer 15

no majority of partners may expel another partner unless the partners have expressly agreed to this in the partnership agreement

therefore, expulsion clause will often allow the partners to expel one of their number if they have conducted themselves in a certain way

Question 16

partnership agreement - dissolution

Answer 16

contractual relationship ending
(even if all but the outgoing partner carry on in business together on the same terms, the original partnership is technically dissolved)

this provision gives the partners more control than relying on the default position - any partner may end the partnership at any time by giving notice of their intention to do so

Question 17

a partnership is dissolved when …

Answer 17

when a partner retires (leaves the partnership)

on expiry of a fixed term

by the death/bankruptcy of any of the partners

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

if something happens which makes it unlawful for the business of the firm to be carried on

an order that the partnership is 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
- the court thinks that, for other reasons, it is just and equitable to order that the partnership be dissolved

Question 18

partnership agreement - distribution of proceeds of sale

Answer 18

when a partnership business is sold, the proceeds of sale of the business or its assets are applied as follows (unless the parties have decided otherwise by agreement):
- creditors of the firm must be paid in full
- partners who have lent money to the firm must be repaid the amount outstanding on the loan, including interests
- partners must be paid the share of the partnerships capital to which they are entitled
- any surplus is shared between the partners in accordance with the terms of their partnership agreement

Question 19

partnership agreement - restrain of trade

Answer 19

seeks to restrict outgoing partners in their business dealings once they have left the partnership

a restraint of trade clause will only be enforceable if it protects a legitimate business interest

this clause includes:
- non-compete clauses
- non-solicitation clauses
- non-dealing clauses

Question 20

partnership responsibilities

Answer 20

partners owe a duty of the utmost fairness and good faith towards one another

they must:
- be completely open with one another regarding any relevant information regarding the partnership
- account to the firm for any private profits they have earned without the other partners’ consent from any transaction concerning the partnership
- not compete with the firm
- bear a share of any loss made by the business
- indemnify fellow partners who have borne more than their share of any liability or expense connected with the partnership

Question 21

when is the partnership liable to third parties?

Answer 21

• contracts
• actual authority
• apparent authority

Question 22

actual authority

Answer 22

the firm is bound by any contract or deed entered into by partners in the firms name, provided that the partners actions were authorised

partners may have acted jointly in making the contract

express actual authority - partners have expressly given one of the partners permission to enter into a particular transaction or type of transaction, or instructed them to enter into a particular contract on behalf of the firm

implied actual authority -partners may have impliedly accepted that one or more partners have the authority to represent the firm in a particular type of transaction (eg to sell the firms products in the ordinary course of business)

Question 23

apparent authority

Answer 23

the firm may be liable for actions which were not actually authorised but which may have appeared to an outsider to be authorised

the firm will be liable to third parties when:

• the transaction is one which relates to business of the kind carried on by the firm
• the transaction is one for which a partner in such a firm would usually be expected to have authority to act
• the other party to the transaction did not know that the partner did not have the authority to act
• the other party deals with a person whom they know or believe to be a partner

Question 24

personal liability

Answer 24

the partner who has made the firm liable by virtue of their apparent authority is liable to indemnify their fellow partners for any liability or loss which
they incur, because the partner has breached their agreement with their partners by acting without actual authority

Question 25

liability in tort

Answer 25

sometimes the firm, as well as the partner in question, is liable for a partners act which is tortious in nature for example -: negligence the 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

Question 26

partners liability for partnership debts

Answer 26

partners have unlimited liability for partnership debts while they are partners there are circumstances in which they can escape liability, depending on when the debt was incurred: - before leaving the partnership - novation agreements - after leaving the partnership

Question 27

partners escaping liability: before leaving the partnership

Answer 27

each partner is liable jointly with the other partners for debts incurred by the partnership while they were a partner court can order a person to contribute towards the judgement debt of another person, court also provides that recovering a judgement sum from one person does not stop the claimant from suing another person who is jointly liable for the same damage

Question 28

partners escaping liability: novation agreements

Answer 28

a retiring partner will be released from an existing debt, by entering into a contract with the creditor and the other partners, and possibly an incoming partner under this contract, the creditor will release the original partners from their liability under the contract and instead the firm as newly constituted will take over the liability an incoming partner will usually agree to this only as part of the package of terms on which they join the partnership

Question 29

partners escaping liability: after leaving the partnership

Answer 29

once a partner has left the partnership, they will remain liable for debts incurred while they were partner (unless there is a novation agreement releasing them from liability in relation to one or more of the debts) however, they will escape liability for any debts entered into after they had left the partnership as long as they comply with the requirements of section 36

Question 30

what does s36 PA 1890 require?

Answer 30

anyone with whom the firm has dealt before must be given actual notice of the partner in question leaving - they must be informed directly - rather than by way of notice in the newspaper - if notice is not given, a person dealing with the firm is entitled to treat all apparent members of the firm as still being members anyone who has not had dealings with the firm before the partner in question left must also be notified of the partners retirement - this is done by placing a notice in the London Gazette

Question 31

holding out

Answer 31

this is when a creditor of a partnership has relied on a representation that a particular person was a partner in the firm the creditor may be able to hold that person liable for the firms debt holding out may be oral, in writing, or by conduct the representation may be made by that person or, provided it is made with the person’s knowledge, by another person

Question 32

enforcing the firms liability

Answer 32

any person who is seeking to enforce a liability of the firm will need to know who can be sued there is a range of potential defendants: - the partner(s) with whom they made the original contract because there is privity of contract between them - anyone who was a partner at the time when the debt was incurred - the firm (ie all the partners), in the firms name

Question 33

insolvency

Answer 33

a state where an individual or business cannot meet their financial obligations when they are due an insolvent partnership can be wound up as an unregistered company or may use the rescue procedures available to companies, such as: - a voluntary arrangement with creditors - an administration order of the court the individual partners may be made bankrupt if an obligation is enforced against their personal assets and there is still not enough to meet the partners’ liabilities

Question 34

tax

Answer 34

partners may need to pay VAT, National Insurance and either income or corporation tax, depending on whether the partner in question is a company or an individual.

Question 35

liability between the partners

Answer 35

the partnership agreement, if there is one, should set out a mechanism for valuing an outgoing partner’s share when a partner leaves the partnership, they will ‘leave in’ the partnership bank account a sum of money to pay their share of any outstanding debts if the remaining partners and the outgoing partner are sued by a creditor in respect of a debt incurred before the partner left the partnership, the outgoing partner may have to pay the third party because they always remain liable to third parties - they may have a contractual right to be reimbursed by the remaining partners, if such a right is included in the agreement - alternatively, they could try to claim an indemnity on the basis that they have incurred liabilities in the ordinary and proper conduct of the business of the firm

Question 36

when a partner cannot pay

Answer 36

if a partner cannot pay a judgment debt owed to a third party, the third party can enforce the debt in the usual way: - may involve obtaining a charge over the partners properties, and then applying for an order for sale of those properties in order to satisfy the outstanding debt - may seize assets belonging to the partner if a partner cannot pay their fellow partners, the other partners have the same enforcement options as a third party - there may be other consequences, like the partnership agreement giving the other partners the right to expel that partner