Partnership Flashcards
Which of the following statements most accurately reflects the position in relation to the formation and management of a limited liability partnership (LLP)?
A-As LLPs are intended for businesses that carry on a profession, only professional businesses can set up as LLPs.
B-An LLP can be set up for charitable or non-profit making purposes.
C-On incorporation, an LLP must file any limited liability partnership agreement which the members have or intend to enter into.
D-LLPs do not need to file annual accounts at Companies House.
E-If a member joins or leaves an LLP, Companies House must be notified.
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.
Which of the following statements best describes the difference between a general partnership and a limited liability partnership (LLP)?
A-Only natural persons, not companies, can be partners in a general partnership, but companies can be members of LLPs.
B-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.
C-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.
D-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.
E-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.
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.
Which of the following statements best describes the position of partners in a general partnership in the absence of contrary agreement?
A-The partners will share the profits equally but will be liable for any losses in proportion to their capital investment in the firm.
B-When a partner leaves the business, that partner is automatically prohibited from working for a competing business.
C-The partners will be entitled to a salary provided that they work full time in the business.
D-Partners need not work full time for the partnership.
E-Voting on management decisions is unanimous.
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.
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.
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 she 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?
A-No, because when she left the firm the client placed a notice in the London Gazette.
B-No, because the remaining partners provided an indemnity for the debt.
C-No, because ex-partners are not liable for debts which are incurred by a firm after their departure.
D-Yes, on the basis of a ‘holding out’, because her name was on the firm’s letterhead at the time the order was made.
E-Yes, because she failed to give the supplier appropriate notice of her departure.
Option E is correct because 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 because the supplier was entitled to actual notice of her departure.
Option B is wrong because an indemnity between partners cannot override the joint and several liability of partners to third parties.
Option C is wrong because, 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 because 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.
A partnership consisting of three partners, has received a letter from a supplier which says the supplier is “going to pursue all four partners in the partnership” for an overdue debt if the debt is not paid within seven days. At the time that the debt was incurred there were only three partners in the partnership. The partners think the supplier was under the impression that there were four partners because the partnership agreed to purchase from the supplier in writing using the firm’s old notepaper. On the old notepaper, a former partner’s details were still included. The former partner stipulated before she left that the firm destroy the old notepaper with her name on it. She did not know the partners had not done this.
Can the former partner be pursued by the supplier for the debt?
A-Yes, because using the old notepaper is a representation to the supplier that the former partner is a partner.
B-Yes, because the former partner should have destroyed the old notepaper herself.
C-No, because the former partner cannot be liable for any debt incurred by the partnership after she retires.
D-No, because the supplier should have checked who the partners were when the purchase was agreed.
E-No, because the former partner did not have knowledge that her name was still on the firm’s notepaper.
Option E is correct because the former partner did not have knowledge that she was being represented as being a partner on the firm’s old notepaper and therefore she cannot be held liable for the debt to the supplier (s14 Partnership Act 1890).
Option A is wrong because while using the firm’s old notepaper with the former partner’s name on it could amount to a representation, the former partner did not have knowledge of such representation and therefore she is not liable for the debt.
Option B is wrong because the former partner did not have to destroy the notepaper herself, although it may have been sensible for her to do this to ensure this was done. The former partner did stipulate to the other partners to destroy the old notepaper with her name on it.
Option C is wrong because a former partner can still be held liable for debts incurred by the partnership after they retire if: (i) they are held out as a partner (s14 Partnership Act 1890); or (ii) they fail to give notice (s36 Partnership Act 1890).
Option D was wrong because the third party supplier does not have to verify the identity and can rely on the representation made.
An experienced dentist is proposing to enter into a partnership with two other individuals. All three individuals are qualified dental professionals and they wish to form a partnership business to run a new dental practice.
The experienced dentist is seeking advice on the terms needed in a written partnership agreement. You have explained that a written partnership agreement offers them the flexibility to determine how the partnership will be managed between the partners. The experienced dentist would like to ensure that all partners are fully devoted to the dental practice business and avoid a situation where the other two individuals decide to only work part-time. The experienced dentist would also like your advice on what rights the partners will have when it comes to time off due to ill-health and injury.
In the absence of any written agreement, which of the following statements best explains the default legal position?
A-There is an obligation on all partners to devote their full time and attention to the running of the partnership business, save when they are unable to due to ill-health or injury.
B-The partners as employees can determine their contractual working hours and will have statutory rights to time off due to ill-health or injury.
C-There is no obligation on partners to work full-time in the partnership business and they do not have automatic rights to time off due to ill-health or injury.
D-The partners must devote the majority of their time to the partnership business and they do not have automatic rights to time off due to ill-health or injury.
E-There is no obligation on the partners to work full-time in the partnership business but they will have statutory rights to time off due to ill-health or injury.
Option C was the correct answer because in the absence of any agreement, section 24(5) Partnership Act 1890 applies which states that every partner may take part in the management of the partnership business. There is no obligation on partners to work full time or devote a minimum amount of time to the partnership business. Partners of a partnership are also not considered employees and therefore do not get automatic statutory rights to time off due to ill-health and injury.
Option A was wrong because there is not an obligation on partners to devote their time to the partnership under the Partnership Act 1890 and partners do not get any statutory entitlement to time off due to ill-health or injury.
Option B was wrong because partners are not employees and therefore do not agree contractual hours under any employment contract. Partners also do not get employee statutory rights to time off due to ill-health or injury.
Option D was wrong because in the absence of any agreement, section 24(5) Partnership Act 1890 applies and this does not provide any obligation to devote any specified time to the partnership business.
Option E was wrong because partners are not employees and therefore do not get employee statutory rights to time off due to ill-health or injury.
A partner left a partnership business last year. On leaving, the partner accounted to the partnership for his share of the partnership debts and the remaining partners indemnified the partner for the debts taken into account in valuing his share.
A creditor is owed £10,000 by the partnership business. This debt was incurred before the partner left the partnership business. The creditor seeks to enforce the debt against the partner.
Which of the following best describes the partner’s position in relation to the debt?
A-The partner is liable for the whole of the debt as it was incurred whilst he was a partner.
B-The partner is liable for his share of the debt as it was incurred whilst he was a partner.
C-The partner remains liable for the whole of the debt but can claim against the remaining partners, relying on the indemnity given.
D-The partner is not liable for any of the debt as his liability was extinguished when he left the partnership business, as he accounted to the remaining partners for his share of any debts.
E-The partner is not liable for any of the debt as his liability was extinguished when he left the partnership business, as the remaining partners indemnified the partner from such claims.
Option C is the correct answer because after leaving a partnership business, partners remain liable to third parties for debts incurred whilst they were a partner (ss.9 and 17 Partnership Act 1890 (PA 1890)). This is the case whether or not the remaining partners indemnify the leaving partner. It is for the leaving partner to then claim against their former partners to be reimbursed. Partners will be liable for the whole of debts incurred as partners are jointly and severally liable for partnership debts (s.9 PA 1890, s3 Civil Liability (Contribution) Act 1978).
Option A is wrong because it is not the best answer as it does not address the indemnity position available to the outgoing partner.
Option B is wrong as partners are jointly and severally liable for the full debt (not just their share of a debt) (s.9 PA 1890, s3 Civil Liability (Contribution) Act 1978).
Option D is wrong because whilst a partner may settle his share of the partnership debts when he leaves a partnership, this does not affect his external liability to third parties for partnership debts incurred whilst he was a partner.
Option E is wrong for the same reasoning as Option D, but additionally the indemnity does not extinguish a former partner’s liability to external third parties. It is merely an internal protection between partners.
An architect, a bricklayer and a carpenter entered into partnership three years ago to carry out building works. The architect contributed £50,000 to the capital of the business, the bricklayer contributed £40,000 and the carpenter contributed £30,000. They agreed to share the profits of the business equally, and not to employ anyone else in the conduct of the business. The terms of their agreement made no reference to how much work each partner had to do, but for the duration of the business, each of them has worked full-time in the business.
The carpenter now wishes to only work for three days a week, and claims that she will not be in breach of any of her obligations to the other partners by doing so.
Will the carpenter be in breach of her obligations to the other partners if she only works three days a week?
A-Yes, because the fact that they share profits equally implies the obligation to do equal amounts of work.
B-Yes, because the obligation to work full-time in the partnership business will be implied by their conduct.
C-Yes, because each partner has the right to participate in the management of the partnership business.
D-No, because the partners could have included the obligation in their agreement but failed to do so.
E-No, because the carpenter should make up for the fact that she has contributed less capital by working more than the architect and the bricklayer, not less.
Option B is correct: The parties are conducting a business in which each brings a special skill to the business of the partnership, and in which they intend that they alone will conduct its business. Their conduct and dealings in working full-time for three years evidences their shared intention that they should work full-time.
Option A is wrong, because the equal sharing of profits does not imply the obligation to do equal amounts of work.
Option C is wrong, because it relates only to the right to participate in the management of the business, not the obligation to work in it.
Option D is wrong, because terms can be implied between partners by their conduct or course of dealings.
Option E is wrong, because the unequal contributions of capital do not imply unequal (or any particular) contributions of work in the business.
Your client wishes to set up a business as a limited liability partnership (LLP).
Which of the following best describes the action which will be required to successfully incorporate the proposed LLP?
A-The necessary forms must be lodged at Companies House, along with a copy of the partnership agreement.
B-Companies House must be notified of the LLP’s share capital as part of the incorporation process.
C-The LLP will be treated as a company for tax purposes and must be registered with HMRC for corporation tax.
D-Registration requires notification of the designated members but not the ordinary members.
E-At least two designated members and an address to be its registered office must be in place for the LLP to be incorporated.
Option E is correct. An LLP must have at least two designated members on incorporation, and notifying a registered address is part of the incorporation process, so putting both elements in place is necessary for a successful incorporation.
Option A is not the best answer. Although the correct form must be lodged at Companies House to incorporate an LLP, there is also a fee to be paid. Importantly, there is no requirement to lodge a copy of any partnership agreement, and so this action should not be taken.
Option B is wrong. An LLP does not have share capital.
Option C is wrong. An LLP is taxed as an ordinary partnership not as a company. Corporation tax will therefore not apply to the LLP and it does not need to be registered with HMRC for such a purpose.
Option D is wrong. Although the incorporation process does require notification of the designated members, it is also necessary to identify each ordinary member.
A limited liability partnership (LLP) is incorporated with two members. The business purpose of the LLP is to fit out office premises. The correct incorporation procedure was followed, and an LLP agreement (the Agreement) signed. The Agreement provides that each member of the LLP has authority to enter contracts of up to £1000 in value. Any amount above this needs unanimous member agreement.
The first member unilaterally enters a contract on behalf of the LLP, to buy £1500 of office equipment from a supplier. The first member uses the LLP’s credit card to place the order.
Which of the following options is correct in relation to the contract?
A-The two members are bound by the contract as the first member had apparent authority. The second member can claim against the first member for their share.
B-The LLP is only bound to pay £1000 under the contract as that is what the first member had actual authority for.
C-The first member exceeded their actual authority and as such is bound by the contract and personally liable for the £1500.
D-The LLP is bound by the contract and must pay the £1500 in full, as the first member had apparent authority. The LLP may claim against the first member for breach of the Agreement.
E-Neither the LLP or the members are bound by the contract as the LLP could not have its own credit card as it is not a separate legal person.
Option D is correct. The LLP is a separate legal person and is the contracting party. From the facts it seems that the first member would have apparent authority (s.6 LLPA 2000) to bind the LLP in this contract. The LLP may claim against the first member for breach of the Agreement for exceeding their actual authority.
Option A is wrong, as it is the LLP that is bound as a separate legal person, not the members.
Option B is wrong, as the first member has apparent authority, so the LLP is liable for the full amount.
Option C is wrong, because it is the LLP as the contracting party who is bound, due to the first member’s apparent authority.
Option E is wrong, as the LLP can have its own credit card as it is a separate legal person.
(BLP SQE 1 Manual paras 6.8.2, 6.8.3 and 6.21)
Quick Q:
In 2012, three people formed a partnership.
The business did well for several years, however, with the introduction of a competitor, its sales began to drop as it lost customers. Consequently, a partner retires from the partnership. The retired partner is concerned that they may be pursued by creditors after they have left the partnership.
The partner immediately gave actual notice to creditors that the partner had left the partnership.
Which of the following best describes the partner’s legal position in relation to debts incurred whilst a partner of the firm?
A partner will be jointly and severally liable for debts incurred whilst a partner of the firm and a creditor will be able to pursue the partner for the full amount of any given debt. However, the partner may be able to claim a contribution from the other partners.
Option C is correct. A partner is jointly and severally liable for partnership debts which were incurred whilst he/she was a partner of the firm (Section 9 and Section 17 of the Partnership Act and The Civil Liability (Contribution) Act 1978). Whilst the partner may be pursued for the full extent of the debt, they may be able to claim a contribution from the other partners provided that they are solvent.
The steps outlined in options A, B and E may, in some way, help with debts which are incurred after retirement, but do not relate to debts incurred whilst a partner and are therefore wrong.
Option D is also wrong as a creditor can pursue any one of the partners for the entire amount of the debt.
When does a partnership come into existence?
A partnership comes into existence not on the agreed date but on the date that the condition in s.1 Partnership Act 1890 is met “carrying on a business in common with a view of profit”
If a loan/contract is entered into before a partner leaves the partnership, are they still liable for the debt?
Yes, because he was a partner when the loan was entered into.
Option A is correct. On retirement, partners do not cease to be liable for debts of the partnership incurred before the date of their retirement (s17(2) Partnership Act 1890).
Impact of death of a partner in a GENERAL partnership
The death will automatically dissolve the partnership but the remaining partners can negotiate to buy out the deceased partner’s share which, if successful, is an alternative to ending the business.
Option B is correct because the death of the partner will dissolve the partnership as there is no agreement to the contrary (s33(1) Partnership Act 1890). However, it is always open to the remaining partners to negotiate to buy the deceased partner’s share. This is beneficial for the deceased partner’s estate as it will receive a sum for the goodwill of the business. If the business is wound up the value of the goodwill will be lost.
Quick Q:
An accountant and two IT specialists have been in general partnership for a number of years, providing technical IT services and support to small start-up businesses. They operate from premises which have a meeting room for partners’ meetings and meetings with clients. Their written partnership agreement states that they share profits and losses equally and that no individual partner can order goods exceeding the total value of £5,000. A delivery of new furniture for the meeting room has been received and it transpires that one of the IT specialist partners ordered the furniture for £6,000, apparently a very good price. The order was made on the firm’s notepaper which lists all the partners’ names. The other partners are not happy with the purchase but the supplier refuses to take the furniture back and is insisting on payment.
Which of the following statements best explains each partner’s liability, if any, in respect of the contract for new office furniture?
C-If the supplier sues the accountant partner alone and recovers the £6,000 from her, she can claim that sum from the partner who ordered the furniture.
Option C is the correct answer because the partner who ordered the furniture has exceeded her actual authority and is therefore in breach of her contract with her fellow partners and must indemnify them for any loss they suffer as a result.
Option A is wrong because it is likely that the partner who ordered the furniture has apparent authority and therefore all partners will be individually fully liable without limit for the debt (s5 Partnership Act 1890).
Option B is wrong because, if the partners are liable for the debt, all of the partners will be individually fully liable without limit for the debt (s9 Partnership Act 1890, s3 Civil Liability (Contribution) Act 1978).
Option D is wrong because it is likely that the purchase of furniture for a meeting room would relate to business of the kind carried on by the firm (s5 Partnership Act 1890).
Option E is wrong because the supplier can sue all or any of the partners and may sue in the name of the firm but is not compelled to do so.
