PARTNERSHIP

Question 1

A client and a friend agreed to set up in partnership to run a gym. They rented some premises, entering into the lease on 1 February. On 10 February, they obtained planning permission to change the use of the premises to a gym. They immediately hired a builder to refurbish and redecorate the premises and install the equipment. The builder started work on 11 February and the work was finished ahead of schedule on 19 February, and the gym opened to customers on 22 February. On 1 March they signed a formal partnership agreement.

Which one of the following statements best describes when the partnership came into existence?

1. 1 February, as this is the date that the partners commenced their business activities.
2. 10 February, as this is the first date that the business could legally trade as a gym.
3. 19 February, as this is the first date that the gym was ready to open to customers.
4. 22 February, as this is the date that the business began to trade.
5. 1 March, as this is the date of the formal partnership agreement.

Answer 1

Option A is correct. A partnership comes into existence when the definition in s.1 Partnership Act 1890 is satisfied. On 1 February, by entering into the lease, the partners appear to have commenced their business activities.

Options B, C and D are wrong. There is no need for a business to commence trading before a partnership comes into existence, but the partners must have done enough to show that they intend to enter into partnership. It is likely that entering into the lease would be evidence of this, so option A is the best answer. It is likely therefore that the partnership existed whether or not it could trade, legally or otherwise.

Option E is wrong. There is no need for a formal partnership agreement.

Question 2

A client and her brother are accountants practising in general partnership. Both the client and the brother invested £10,000 when the firm was set up. There are no other partners. The client’s brother gave a businessman tax advice which turned out to be wrong. The firm has admitted negligence and has agreed to settle the dispute and pay the businessman £30,000 to compensate for the loss. The firm does not have sufficient assets to pay the debt.

Will the client be personally liable for the debt?

1. Yes, because the client is a general partner with one other, she will be liable for her half of the debt, £15,000.
2. Yes, because the client is a general partner, she will be liable for the full £30,000.
3. Yes, because the client invested £10,000 in the practice, she will only be liable for the £10,000.
4. No, because it was the client’s brother who gave the advice.
5. No, because the client will have the benefit of limited liability.

Answer 2

Option 2 is correct. Partners have unlimited liability for the debts of the partnership and are jointly liable for the full amount of the debt.

Options A and C are wrong. Joint liability does not mean that partners are only liable for half of the debt and, unlike shareholders, their liability is not capped at the amount of their investment in the company.

Option D is wrong as partners are jointly and severally liable, regardless of who concluded the contract.

Option E is wrong. The liability of a partner for the debts of the partnership is unlimited, not limited.

Question 3

Which of the following statements best describes the position of partners in a general partnership in the absence of contrary agreement?

1. The partners will share the profits equally but will be liable for any losses in proportion to their capital investment in the firm
2. When a partner leaves the business, that partner is automatically prohibited from working for a competing business.
3. The partners will be entitled to a salary provided that they work full time in the business.
4. Partners need not work full time for the partnership.

Answer 3

Option D is correct. In the absence of contrary agreement, the default rights set out in s.24 of the Partnership Act 1890 will apply. However, these provisions do not cover every aspect of the management of the partnership and there is nothing in the Act requiring the partners to devote their full time and attention to the partnership business.

Option A is wrong. Section 24(1) provides that the partners share the profits and any losses equally.

Option B is wrong. There is nothing in the Partnership Act which prohibits a partner from working for a competing business after leaving the firm.

Option C is wrong. Under s.24(6), a partner is not entitled to a salary.

Option E is wrong. Most decisions will be made by simple majority, where each partner has one vote, on a show of hands, although certain important decisions such as changing the nature of the business (s.24(8)) or the introduction of a new partner (s.24(7)) require unanimity

Question 4

A client enters into partnership with his sister. The client provides 75% and the sister provides 25% of the capital needed to do up the business premises and buy the partnership assets. The client will work full time in the business but his sister will only work four days a week. There is no written partnership agreement and nothing else has been agreed orally between the partners.

Which of the following statements most accurately reflects the position in relation to the profits, capital and management of the business?

1. The client is entitled to 75% of the profits of the business and his sister is entitled to 25%.
2. The client will be entitled to a salary to reflect the fact that he will spend more time working in the business than his sister.
3. As the sister will be working for less time in the business than the client, she cannot take part in all management decisions.
4. As the client has contributed a greater amount of capital into the business, the client can introduce a new partner to the business, even if his sister objects.
5. When the partnership is dissolved and assets sold, both partners will be entitled to an equal share of the proceeds of sale of the partnership assets.

Answer 4

Option E is correct. There is no partnership agreement, so the default provisions of s.24 of the Partnership Act 1890 apply. This provides that, in the absence of contrary agreement, the partners are entitled under s.24(1) to share equally in the capital of the business.

Option A is wrong. Section 24(1) provides that partners share equally in the profits (and any losses) of the business.

Option B is wrong. Under s.24(6), a partner is not entitled to a salary.

Option C is wrong. Under s.24(5) all partners are entitled to take part in the management of the company.

Option D is wrong. Introduction of new partners requires unanimity under s 24(7).

Question 5

A carpenter and an accountant have been partners for several years in a boatyard, which repairs and sells wooden boats to consumers. They have no partnership agreement. They have always purchased their stock from a wholesaler which does not supply directly to the public. Two years ago, the wholesaler had suggested a merger of the two businesses, but the carpenter did not consider this to be a good idea as he wanted to keep the business small. A year later, the wholesaler approached the accountant. The accountant, knowing that the carpenter would not agree to the merger, negotiated to join the wholesaler as a sleeping partner. The carpenter has just found out about the agreement.

Which of the following statements most accurately describes the best option for the carpenter as a result of the accountant’s actions?

1. The firm may be entitled to any profit which the accountant has made from the wholesale business as he has benefitted from an opportunity originally offered to the partnership.
   2 The carpenter may be entitled to claim a share of the accountant’s profits from the wholesale business because the accountant has benefitted from a competing business.
2. The carpenter can expel the accountant from the partnership.
3. The carpenter can give notice to the accountant that he is leaving the partnership, but the accountant will continue to trade as a partner in their firm.
4. The carpenter can sue the accountant for breach of contract, because the accountant is in breach of his duty to devote the whole of his time to their firm.

Answer 5

Option A is correct. Under s.29 of the Partnership Act 1890, the accountant is under a duty to account for any private profits which he has earned from any transaction concerning the partnership without the carpenter’s knowledge or consent. This is clearly the case here as the carpenter has only just found out about it and the accountant has earned profits by benefitting from a business opportunity that originally came to the firm.

Option B is not the best option as we are told that the wholesaler does not supply directly to the public and it would therefore appear that the wholesale firm is not a competing business. There is therefore no breach of s.30. In the event of a breach, the accountant may be required to account for and pay over all profits which he has made.

Option C is wrong. In the absence of a partnership agreement, the carpenter has no power to expel the accountant (s.25 PA), nor to force him to sell his share.

Option D is wrong. If the carpenter gives notice to retire from the firm, this will dissolve the firm. In any event, one partner acting alone cannot continue as a partner since it no longer involves ‘two or more persons’ and so the definition of a partnership in s.1 of the Act is not met.

Option E is wrong. There is no provision under the Act requiring partners to devote the whole of their time to the partnership.

Question 6

A partnership has three partners. Each partner is responsible for a different area of the business. The partners have agreed that any spend over £30,000 must be authorised by all three partners. The partner responsible for dealing with equipment purchases an item of equipment from their usual supplier, with whom he has dealt on many occasions in the past. The item is on sale at a cost of £32,000. The partner does not consult the other partners.

Is the partnership bound by the purchase?

1. Yes, because the partner had actual authority to purchase the equipment as this falls within his area of responsibility.
2. Yes, because the partner has implied actual authority to purchase the equipment.
3. Yes, because the partner has apparent authority to purchase the equipment.
4. No, as it would be unreasonable for the supplier to assume that the partner would have authority to make the purchase on his own.
5. No, because the partner has no authority to spend £32,000.

Answer 6

Option C is correct. Although the partner was not actually authorised to spend £32,000, it would appear to an outsider that the partner was authorised. The transaction is one for which a partner would usually be expected to have the authority and therefore the firm will be liable under s.5 PA 1890.

Option A is wrong. Even though the purchase falls within his area of responsibility, the partner only had actual authority up to the value of £30,000.

Option B is wrong. The partnership has agreed a limit of £30,000 on spend so there is a limitation on the authority and the partner does not have the implied actual authority for a spend of £32,000.

Option D is wrong. The partnership is bound, as it would be reasonable for the supplier, who has dealt with the partnership before, to assume that the partner entrusted with the purchase of equipment for the partnership would have had the authority to purchase the equipment.

Option E is wrong. The partnership is bound by apparent authority.

Question 7

A client was in general partnership with two other partners until six months ago. She is being sued by a supplier to the firm. The supplier was a customer of the firm at the date of her departure and knew the client was a partner. The claim is for non-payment for supplies ordered by and delivered to the firm three months ago.

When she left the firm, the client placed a notice in the London Gazette, asked the remaining partners to remove her name from the firm’s letterhead and received an indemnity from the remaining partners in relation to debts of the firm. She took no further action in relation to her departure. Yesterday the client discovered that the remaining partners placed the order with the supplier using old letterhead which included her name.

Is the supplier entitled to claim the entire debt from the client?

1. No, because when she left the firm the client placed a notice in the London Gazette.
2. No, because the remaining partners provided an indemnity for the debt.
3. No, because ex-partners are not liable for debts which are incurred by a firm after their departure.
4. Yes, on the basis of a ‘holding out’, because her name was on the firm’s letterhead at the time the order was made.
5. Yes, because she failed to give the supplier appropriate notice of her departure

Answer 7

Option E is correct. The supplier did not receive actual notice of the client’s departure from the firm and was therefore entitled to treat her as a continuing partner in the firm.

Option A is wrong. The supplier was entitled to actual notice of her departure.

Option B is wrong. An indemnity between partners cannot override the joint and several liability of partners to third parties.

Option C is wrong. Although ex-partners are not generally liable to third parties for debts the firm incurs after their departure, there are exceptions, such as where appropriate notice of a partner’s departure has not been given to third parties.

Option D is wrong. The client, by requesting the removal of her name from the firm’s letterhead, did not hold out, or knowingly allow herself to be held out, as a partner in the firm.

Question 8

Which of the following statements most accurately reflects the position in relation to the formation and management of a limited liability partnership (LLP)?

1. As LLPs are intended for businesses that carry on a profession, only professional businesses can set up as LLPs.
2. An LLP can be set up for charitable or non-profit making purposes.
3. On incorporation, an LLP must file any limited liability partnership agreement which the members have entered into at Companies House.
4. LLPs do not need to file annual accounts at Companies House.
5. If a member joins or leaves an LLP, Companies House must be notified.

Answer 8

Option E is correct. LLPs are subject to greater transparency requirements than a general partnership and are required to notify the Registrar of Companies whenever a member joins or leaves the LLP.

Option A is wrong as, although LLPs are mostly used by professional firms, any business can be set up as an LLP (or any existing partnership can convert to one).

Option B is wrong as an LLP may be registered where two or more persons are associated for the purpose of carrying on a lawful business with a view to profit (s.2(1) of the Limited Liability Partnership Act 2000), which precludes non-profit making organisations or charities from becoming LLPs. The same is true of general partnerships.

Option C is wrong. One of the advantages of an LLP is that the LLP agreement is not a matter of public record.

Option D is wrong. LLPs are required to file annual accounts.

Question 9

Which of the following statements best describes the difference between a general partnership and a limited liability partnership (LLP)?

1. Only natural persons, not companies, can be partners in a general partnership, but companies can be members of LLPs.
2. There is no need for partners in a general partnership to have a partnership agreement, but members of an LLP must be parties to a limited liability partnership agreement.
3. In the absence of contrary agreement, the death of a partner will dissolve the partnership, whereas an LLP will not dissolve on the death of a member.
4. Partners in a general partnership cannot contract out of personal liability for the debts or losses of the partnership, but members of an LLP must do so in order to avoid personal liability.
5. In the absence of contrary agreement, partners in a general partnership share profits equally, but members of an LLP share profits in proportion to their capital contributions.

Answer 9

Option C is correct. A general partnership is an unincorporated body and has no legal personality distinct from its members, who are collectively ‘the firm’. If a partner dies, this will automatically dissolve the partnership. A limited liability partnership (LLP) is an incorporated body (a body corporate, like a company) and so is a distinct legal entity and has ‘perpetual succession’. A member dying does not affect its existence.

Option A is wrong as the definition in s.1 Partnership Act 1890 (which refers to ‘two or more persons’) includes ‘legal persons’, so as well as natural persons, a general partnership can have a company as a partner. The same is true of an LLP.

Option B is wrong. Neither a general partnership nor an LLP need to have a partnership agreement. Unlike a company, an LLP does not have to register a constitutional document on formation of the LLP equivalent to the articles of association of a company.

Option D is wrong. Partners have unlimited liability for the debts and losses of the business. They cannot contract out of this liability, so the first part of this statement is correct. The members of an LLP, however, automatically have limited liability for the debts and liabilities of the LLP, and so members do not need to avoid unlimited liability.

Option E is wrong as both partners in a general partnership and members of an LLP share profits equally.

Question 10

A client and several colleagues, who are employees in a management consultancy business, want to leave their current employment and set up a limited liability partnership (LLP). They will all be the members of the LLP. All except two of the members will work full time for the LLP. Several of the client’s colleagues do not want to incur the additional expense involved in drawing up and entering into a limited liability partnership agreement. The client, however, is concerned about the implications of this, and wants advice in relation to the management structure of the LLP in the absence of such an agreement.

Which of the following statements most accurately describes the position in relation to decision making within the LLP if there is no agreement?

1. Only the members who work full time in the LLP will be entitled to take part in management decisions.
2. Where there is a dispute between the members as to the day-to-day management of the LLP, this can be resolved by a majority decision of the members.
3. Only the designated members of an LLP can take part in the management decisions.
4. A new member can join the LLP if a majority of the members agree.
5. A member of the LLP can be expelled by a unanimous decision of the members.

Answer 10

Option B is correct. The question relates to the default provisions in Regulation 7 and 8 of the Limited Liability Partnership Regulations 2001. Most disputes between members relating to day-to-day management decisions can be resolved by simple majority. It is only decisions to change the type or nature of the business requires unanimous consent.

Option A is wrong as all members are entitled to participate in the management of the LLP.

This also makes Option C wrong. Designated members, although they have a role similar to directors of a company, are responsible for administrative and legal requirements.

Option D is wrong. Under Regulation 8, a new member cannot be appointed without the unanimous consent of all the members.

Option E is wrong. A member cannot be expelled unless the power to do so has been conferred on the members by an express agreement, which is not the case on the facts.