Partnership

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.

Question 2

Factors to help determine whether two or more people are carrying on a business in common

Answer 2

None of these factors are conclusion.
a) Do the individuals all take part in decision-making?
b) Whose names are on the title deeds of any property?
c) How are profits shared?

Question 3

The partnership act

Answer 3

This provides a default contract which governs the relationship between the partners unless they have agreed any specific terms. Whilst most of the PA can be overriden by agreement some sections cannot e.g S. 1 and S. 2 which govern when a partnership comes into existence and S. 5-18 which cover the relationship between the partners and third parties.

Question 4

The partnership agreement - Name

Answer 4

Partnership names must not:
- Include limited, LTD, limited liability partnership, LLP, public limited company or plc
- Be offensive
- Be the same as an existing trademark
- Contain a sensitive work or expression
- Suggest a connection with government or local authorities without permission

Question 5

The partnership agreement - Place and nature of business

Answer 5

The agreement may set out the partnership’s place of business, area of geographical operation and the nature of business

Question 6

The partnership agreement - Commencement and duration

Answer 6

A partnership begins when the definition in S. 1 is satisfied not when the parties decide that it has commenced. If the partners carry on in a business after the expiry of the fixed term and do not enter into a new agreement they are presumed to be partners on the same terms as before

Question 7

The partnership agreement - Work input

Answer 7

Under PA partners may take part in the management of the business but they are not required to do so. The partnership agreement should therefore set out each partner’s working hours or state that they must work full-time for the business.

Question 8

The partnership agreement - Roles

Answer 8

Partnership agreement should set out each partner’s role.

Question 9

The partnership agreement - Decision-making

Answer 9

With 3 exceptions all decisions in a partnership must be taken by majority. These are:
1) Changing the nature of the business
2) Introducing a new partner
3) Changing the terms of the partnership agreement
All of these can only be made unanimously.

Question 10

The partnership agreement - Financial input

Answer 10

The partners will usually all contribute a sum of money to enable the partnership to start operating, these initial contributions are classed as capital. The agreement should set out the amount of the partner’s initial capital contributions and whether they will be obliged to contribute more capital in the future

Question 11

The partnership agreement - Shares in income and capital profits and losses

Answer 11

Under PA partners share equally in the capital and income profits of the business. Often if the parties have contributed different amount to the partnership’s capital they will decide that they should own the partnership capital in those same proportions, and income profits. Partners have unlimited liability for the debts of the partnership and are jointly liable for the full amount of the debt.

Question 12

The partnership agreement - Drawings and salaries

Answer 12

Partners are not employees they own the business and the income profits which partners receive are known as drawings. The partnership agreement should set out how much each partner is allowed to ‘draw down’ in any given period. In the absence of agreement partners are entitled to share equally in income profits.

Question 13

The partnership agreement - Ownership of assets

Answer 13

Must ensure that the partnership agreement sets out how the assets the partnership uses are owned.

Question 14

The partnership agreement - Expulsion

Answer 14

Under default provisions of PA no majority of partners may expel another partner unless the partners have expressly agreed to this in a partnership agreement.

Question 15

The partnership agreement - Dissolution

Answer 15

It is better for the partners to provide for dissolution in the partnership agreement by setting out under what circumstances a partner can retire or when the partnership will come to an end. This gives partners more control than relying on the default position in the PA which is that any partner may end the partnership at any time by giving notice of their intention to do so to all of the other partners. Partnership agreements can contain notice provisions which remove partner’s right to dissolve the partnership with immediate effect

Question 16

The partnership agreement - Dissolution - Under PA

Answer 16

Under the PA a partnership is dissolved:
- When a partner retires
- On expiry of a fixed term
- By the death or bankruptcy of any of the partners
- If the partners give notice of dissolution to a partner who has granted a charge over their share of the partnership property

Question 17

The partnership agreement - The effect of dissolution

Answer 17

Automatic dissolution means that unless the partners all agree otherwise the partnership must end, all the assets must be sold and the outgoing partner has to receive their share. An outgoing partner can insist on the business being sold so the other partners don’t have the option of continuing the business

Question 18

The partnership agreement - Partial dissolution

Answer 18

The partnership agreement states that in the event that a partner leaves the remaining partners will continue the partnership

Question 19

The partnership agreement - Dissolution - Buying outgoing partner’s share

Answer 19

PA needs to specify whether the other partners must buy the outgoing partner’s share or whether they merely have the option to do so. Also needs to include an indemnity in favour of the outgoing partner if their liabilities were taken into account when their partnership share was valued

Question 20

The partnership agreement - Good will

Answer 20

Goodwill = business’s reputation and the value of its clients and contacts. When a business is sold part of the purchase price will be for the business’s goodwill because the business is up and running and can continue as before. Usually 2 years’ profit

Question 21

The partnership agreement - Distribution of proceeds of sale

Answer 21

PA - when a partnership is sold the proceeds of sale of the business or its assets are applied:
- First of all creditors of the firm must be paid in full, if there is a shortfall the partners must pay the balance from their private assets.
- Secondly partners who have lent money to the firm must be repaid the amount outstanding on the loan
- Thirdly partners must be paid the share of the partnership’s capital to which they are entitled
- Lastly any surplus is shared between the partners in accordance with terms of partnership agreement

Question 22

The partnership agreement - Restraint of trade

Answer 22

It is usual for partnership agreements to contain a restraint of trade clause which seeks to restrict outgoing partners in their business dealings once they have left the partnership. No restraint in PA.

Question 23

Partner’s responsibilities under the PA

Answer 23

Partners owe a duty of the utmost fairness and good faith towards one another. The partners must bear a share of any loss made by the business in accordance with the terms of their partnership agreement.

Question 24

Specific duties of partners under PA

Answer 24

1) Must be completely open with one another
2) Must account to the firm for any private profits earned from any transaction concerning the partnership
3) Must not compete with the firm
4) Bear a share of any loss made by the business
5) Indemnify fellow partners

Question 25

When is the firm liable to third parties? - Contracts

Answer 25

Contracts may be made by all of the partners acting together or by just one of the partners

Question 26

When is the firm liable to third parties? - Actual authority - Definition

Answer 26

The firm is bound by any contract or deed entered into by partners in the firm’s name provided that the partners actions were authorised by the partners.

Question 27

When is the firm liable to third parties? - Actual authority - Express actual authority

Answer 27

The partners may 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. The firm is bound by any contract that the partner makes within the scope of that authority

Question 28

When is the firm liable to third parties? - Actual authority - Implied actual authority

Answer 28

The partners may have impliedly accepted that one or more partners have the authority to represent the firm in a particular type of transaction. If all the partners are involved in running the business without any limitations it will be implied that each partner has authority. May also be implied by a regular course of dealing by one of the partners to which the other partners have no objected.

Question 29

When is the firm liable to third parties? - Apparent authority - Definition

Answer 29

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

Question 30

When is the firm liable to third parties? - Apparent authority - PA circumstances

Answer 30

Even if between the partners there is an express or implied limitation on the partner’s authority the firm will be liable to third parties when:
1) The transaction is one which relates to business of the kind carried on by the firm
2) The transaction is one for which a partner in such a firm would usually be expected to have authority
3) The other party to the transaction did not know that the partner did not have authority to act
4) The other party deals with a person whom they know or believe to be a partner

Question 31

Personal liability - Definition

Answer 31

Where a partner has acted with apparent authority the firm will be liable to the third party. In addition the parter who has made the firm liable is liable to indemnify their fellow partners for any liability or loss which they incur.

Question 32

Personal liability - partner’s liability for partnership debts

Answer 32

Each partner is liable jointly with the other partners for debts incurred by the partnership while they were a partner. A claimant can sue any or all of the partners. In a novation agreement a retiring partner will be released from an existing debt and the incoming partner will incur it. Once a partner has left the partnership they will remain liable for debts incurred while they were a partner unless there’s a novation agreement. However they will escape liability for any debts entered into after they had left the partnership as long as they comply with S. 36

Question 33

Personal liability - partner’s liability for partnership debts - S. 36 and retired partners

Answer 33

Under S. 36 anyone with whom the firm has dealt with before must be given actual notice of the partner in question leaving. This means that they must be informed directly. 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

Question 34

Holding out

Answer 34

When a creditor of a partnership has relied on a representation that a particular person was a partner in the firm (holding out) they may be able to hold that person liable for the firm’s debt. This would be the case even if the person had never been a partner or had retired before the contract was made. Might be made by that person or made by another person with the person’s knowledge

Question 35

Holding out - What may the holding out be

Answer 35

1) It might be oral e.g if the person was described as a partner in conversation.
2) In writing e.g leaving partner’s name on firm’s notepaper
3) Conduct

Question 36

Holding out - Effect

Answer 36

Any creditor who can establish that someone held themselves out or allowed themselves to be
held out as a current partner, that they relied on the holding out and that they gave credit to
the firm as a consequence will be able to sue that person for the debt owed by the firm.

Question 37

Enforcing the firm’s liabilities

Answer 37

Claimant can sue:
1) Partner(s) with whom they made the contract
2) Anyone who was a partner at the time when the debt was incurred - the partners can claim an indemnity from their partners
3) The firm (all the partners) - anyone who was a partner at the time when the debt was incurred is jointly liable