Lecture 1- Types of Trade

Question 1

What are the organisations or the legal personalities in the UK?

Answer 1

Sole Traders
Partnerships
Limited Liability Partnerships

Question 2

What is a sole trader and its structure?

Answer 2

a sole trader operates as an individual without forming a separate legal entity, meaning the business and the owner are legally one and the same
Key Characteristics:
- Simplicity: Setup is straightforward, requiring minimal registration (e.g., notifying HMRC for tax purposes).
- Complete Control: The sole trader has total control over decision-making.
- Unlimited Liability: The sole trader is personally liable for all debts, meaning personal assets are at risk if the business fails

Question 3

What are the advantages of a sole trader?

Answer 3

• Simplicity and low setup costs
• Control over business decisions
• Tax Efficiency: Unlike corporate taxes, sole traders may benefit from a simpler tax structure if profits are within lower tax brackets
• Flexibility
• Low administration
• Profits are all sole trader’s
• Independence
• No boss

Question 4

What are the disadvantages of a sole trader?

Answer 4

• main disadvantage - if business “goes under” the sole trader may lose all his assets as the business is not a separate legal entity (Contrast Limited Company)
• Individual is the business - will work long hours can be lonely/business can be severely disrupted if illness strikes.
• Lack of economies of scale
• Tax Burden: As profits grow, sole traders may face higher tax rates than they might in a corporate structure, where profits can be retained in the business at a lower corporation tax rate
• Perhaps the main difficulty that a sole trader face is that of raising finance. Commercial lenders will need to see security/collateral for a loan. Banks tend to demand very solid security for any money advanced. Banks will normally require a mortgage on a property and /or a guarantor who agrees to pay the loan if the borrower defaults

Question 5

What is a partnership and it’s characteristics?

Answer 5

• General partnerships are also known as unlimited partnerships or ordinary partnerships and are governed by the Partnership Act 1890, which defines a partnership as ‘the relationship which subsists between persons carrying on a business with a view to profit’
  Characteristics:
• Unlimited Liability where partners have joint and several liability for the debts of the partnership. Creditors can claim against any or all partners personally for the full amount of the partnership’s debts, exposing personal assets to risk
• A partnership is not a separate legal entity therefore every partner is liable without limit for the debts of the partnership

Question 6

It’s generally preferred to trade through a limited company, why is that?

Answer 6

• The main advantage is that a limited company has a separate legal existence from its members and if the company fails the members are only liable for the unpaid amounts on their share capital and not the debts of the company

Question 7

Partnership Act 1980

Answer 7

• This Act sets out the basic rights and duties of partners these rights and duties can be overruled by the actual partnership agreement but give the default position such as:
  ~ profits and losses are to be shared equally
  ~ 5% interest is paid on advances above original capital
  ~ Remuneration ‐ no partner is entitled to remuneration for acting in the partnership business
• Any decision on changing the nature of the partnerships business must be unanimous.
  The partnership agreement may be varied with the consent of all the partners.
  New partners must only be introduced with the unanimous consent of existing partners.
  No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.
  Pragmatic point a partner may only be expelled by a majority of votes when the partnership agreement allows; even then, the power must be used in good faith and for good reason.

Question 8

Partnerships Fiduciary Duties

Answer 8

Partners owe a duty of good faith to one another, these duties are broad but partners:
- must render true accounts and information
- must account for profits
- must not compete with the firm
- must avoid conflict of interests without full disclosure

Breach of these fiduciary duties may render the partner responsible liable to account to the partnership for any monies received or to make good any other loss suffered
Bentley v Craven (1853) is a foundational case in partnership law, primarily addressing fiduciary duties and the duty to avoid conflicts of interest within a partnership:

Craven, one of the partners in a sugar refining business, purchased sugar on his own account at a low price and then sold it to the partnership at a higher market price, making a profit. He did not disclose to his partners that he had previously acquired the sugar for his own benefit.

Held: The court ruled that Craven breached his fiduciary duty to the partnership by failing to disclose his personal interest in the transaction. Partners owe each other duties of loyalty and full disclosure, and they must avoid situations where they benefit personally at the expense of the partnership.

Outcome: Craven was required to account for and return the profit he made to the partnership

Question 9

Authority of Partners

Answer 9

Each partner acts as an agent of the partnership and has the authority to bind the firm in business transactions within the scope of ordinary business (Section 5).
If a partner exceeds this authority in ways outside the ordinary course of business (e.g., taking on unusually large debt), they may not bind the other partners unless those partners consent.

Pragmatic Point: the authority of a partner often depends on the perception of the third party.
Generally, if the third party genuinely believes that the partner has authority, it is highly likely that the acts of the partner will bind the firm

Question 9

Liability of Partners

Answer 9

• Joint Liability (Section 9): partners are jointly liable for debts and obligations arising from contracts
• Joint and Several Liability (Section 10-13): partners are jointly and severally liable for wrongful acts or omissions by any partner acting in the ordinary course of business or with the authority of the partners. For example, if a partner negligently causes harm while conducting business, each partner may be held personally liable

The Civil Liability (Contribution) Act 1978 is a UK law that governs how liability is shared among multiple parties responsible for the same damage or loss. It primarily addresses situations where two or more parties are jointly liable to a claimant, allowing one party to seek a contribution from another for their share of the liability

Question 10

Dissolution of Partnership

Answer 10

A partnership can always be dissolved by agreement. Partnership Act 1890 provides that a partnership will be dissolved in the following circumstances:
- Fixed time /specific venture
- Death or bankruptcy of one of the partners ‐ but the partnership agreement may vary this
- Illegality ‐ supervening illegality‐solicitor failing to renew practising certificate
- Court-Ordered Dissolution (Section 35): a court can order dissolution if it deems the partnership is no longer practicable (e.g., if partners are in conflict or if a partner is incapacitated)

Pragmatic point:
The partnership agreement shall normally provide that the partnership business shall continue on the death, retirement or bankruptcy of any partner so that
dissolution is merely a technicality.It may also provide that the partnership shall only be dissolved with the
mutual consent of all the partners

Question 11

What happens in a partnership if there’s a default on a secured loan?

Answer 11

Where a partnership is in default on a secured loan, its
creditors may act against the partners individually
or sue them in the name of the partnership.
If the partnership is insolvent bankruptcy proceedings may be
brought against the individual partners and /or the
partnership may be wound up

Question 12

Limited Liability Partnerships (LLP)

Answer 12

LLPs are hybrids between partnerships and companies, offering limited liability to partners while allowing flexibility in management and taxation similar to partnerships. LLPs must register with Companies House and are governed by the Limited Liability Partnerships Act 2000
- LLPs can have an unlimited number of partners
- Since the LLP is a separate legal entity, the members are not jointly liable for contracts entered into by the LLP and/or jointly liable for any wrong‐doings committed by the LLP.
However, members may be liable for their own acts of negligence in much the same way as company directors

Question 13

What are the advantages of LLP?

Answer 13

The main advantage of an LLP over a traditional partnership is that the LLP will be liable for its own debts rather than the partners.
All contracts with third parties will be with the LLP

Question 14

What are the disadvantages of LLP?

Answer 14

A consequential disadvantage of a LLP is that suppliers and creditors generally may be less willing to extend credit than they would be to a traditional partnership

Question 15

Internal Regulations LLP

Answer 15

The rights and duties of the partners will usually be set out in a partnership agreement. In the absence of a partnership agreement the regulations of the LLP Act will apply.
These basically apply the provisions of the companies’ legislation to LLPs and also default provisions in line with the Partnership Act 1890,dealing with profit share, remuneration, inspection of books and expulsion

Practicalities of the internal regulations
- No board of directors and hence no directors
report is required.
- There is an obligation to prepare and publish
annual accounts.
- Annual audits are required subject to usual
exemptions.
- Every member may take part in the
management of the LLP.

LLP must:
- Maintain a register of charges and register charges with
the Registrar
- Notify the Registrar of any changes in membership,
designated members or registered office
- Provide the name of the LLP on correspondence and
outside its place of business
- Deliver a confirmation statement to the Registrar each year

Question 16

LLP Members Liability

Answer 16

The LLP is responsible for the debts and obligations of the firm’s business and normally members will not face personal liability.
There is an exception which may apply to an LLP of professionals. If a partner is negligent s/he will be personally liable but if it is considered s/he is acting for the LLP then it will be up to the LLP to meet the damages.

Question 17

LLP Authority

Answer 17

The Act provides that each member is an agent of the LLP and therefore has the power to bind the LLP by his or her acts.
The LLP will not be bound by his or her acts where:
- The member does not have authority and the third party is aware that she does not have authority or does not know or believe her to be a partner

Question 18

LLP Termination and Insolvency

Answer 18

An LLP has perpetual succession until it is dissolved or terminated. This is usually by its members unanimously.
Where the LLP becomes insolvent, members of the LLP may propose a voluntary arrangement, apply to put the business into administration or resolve to go into voluntary or compulsory liquidation