Partnership Flashcards
What is a partnership?
A partnership comes into existence when two or more persons are carrying on a business in common with a view of profit.
Factors to help determine whether two or more people are carrying on a business in common
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?
The partnership act
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.
The partnership agreement - Name
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
The partnership agreement - Place and nature of business
The agreement may set out the partnership’s place of business, area of geographical operation and the nature of business
The partnership agreement - Commencement and duration
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
The partnership agreement - Work input
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. Work may be implied by conduct
The partnership agreement - Roles
Partnership agreement should set out each partner’s role.
The partnership agreement - Decision-making
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.
The partnership agreement - Financial input
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
The partnership agreement - Shares in income and capital profits and losses
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.
The partnership agreement - Drawings and salaries
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.
The partnership agreement - Ownership of assets
Must ensure that the partnership agreement sets out how the assets the partnership uses are owned.
The partnership agreement - Expulsion
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.
The partnership agreement - Dissolution - Under PA
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
The partnership agreement - Partial dissolution
The partnership agreement states that in the event that a partner leaves the remaining partners will continue the partnership
The partnership agreement - Dissolution - Buying outgoing partner’s share
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
Distribution of proceeds of sale
1) Proceeds used to pay off debts
2) Balance used to return capital (any loans from partners)
3) Rest is distributed to partners
The partnership agreement - Restraint of trade
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.
Specific duties of partners under PA
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
When is the firm liable to third parties? - Contracts
If they have actual or apparent authority
When is the firm liable to third parties? - Actual authority - Definition
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.
When is the firm liable to third parties? - Actual authority - Express actual authority
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
When is the firm liable to third parties? - Actual authority - Implied actual authority
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.
When is the firm liable to third parties? - Apparent authority - Definition
The firm may be liable for actions which were not actually authorised but which may have appeared to an outsider to be authorised.
When is the firm liable to third parties? - Apparent authority - PA circumstances
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
Personal liability - Definition
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.
Personal liability - partner’s liability for partnership debts
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.
Retirement and liability - General rule
General rule = liable for all debts incurred whilst you were a partner.
To escape this you should:
1) Get an indemnity from fellow partners
2) Novation agreement
Retirement and liability - Indemnity
From continuing partners. However it does not give total assurance since the continuing partners may not, in the event, be able to meet their liabilities under the indemnity
Retired partners and ongoing liability - S. 36
A partner will escape liability for any debts entered into after they had left the partnership as long as they comply with S. 36. 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 it is a person they haven’t dealt with before a notice in London gazette will be enough
Holding out - What may the holding out be
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
Holding out - Effect
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.
Enforcing the firm’s liabilities
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
Novation agreement
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.
LLP and apparent authority of members
If a partner enters into a contract with apparent authority the LLP is bound and can be sued and then claim against the partner. It is the LLP who is bound not the partners
Leaving a partnership if there is not partnership agreement
No express agreement as to the duration of the partnership so it is a partnership at will so it is capable of being dissolved by the partner giving notice. (Automatic dissolution)
Retirement if there is no partnership agreement
There is no retirement clause as there is no partnership agreement so the partner cannot simply withdraw or retire
Selling interest in partnership if there is no partnership agreement
The client cannot just sell her interest to an outsider
What does disollution mean
It ends the partnership. The business is then sold as a going concern or the individual assets are sold
Advantages of selling business as going concern
Value of any goodwill will be realised
Options other than dissolution even if they don’t have a partnership agreement
1) Negotiate with other partners to buy them out
2) Find substitute partner
3) Continue partnership but convince them to run it more sensibly
4) partnership agreement - partial dissolution clause
Holding out
This is an exception to S.36 that partners will escape liability when they stop being a partner if they or someone else with their consent holds you out to be a current partner. If it was without your permission you will be fine
