Partnership Flashcards
What is a partnership?
as a relationship between persons carrying on a business in common with a view to making a profit.
- Evidence of profit sharing
- If all individuals take part in decision making
- A loan of money by one party to another does NOT create.
Personal liability for partnership debts?
- No separate legal personality
- Contractual liability – jointly liable for all debts and obligations whilst incurred as partner s9
- Tortious liability
Liability of non-partners:
New partners - S17 a new partner will NOT automatically be liable in relation to any debts before they joined
- S17(2) a partner will STILL be liable after the retire in respect of debts incurred whilst they were a partner. In order to relieve, a partnership may novate the relevant agreement, with consent of creditors.
Former partners - Possible even after they have left
- A third party can treat all apparent partners of firm as jointly liable unless they were notified of change
- Actual notice s36 – for those who have had dealings with partner before departure
- Constructive notice – by virtue of publication in Gazette
Contracts binding the firm?
- Depends on the individual acting on partnerships behalf is a partner or not
- Partners as per s5 – rule of agency which only applies when they’re a partner. Common law rule of agency will also apply
- Non-partners – common law of agency will apply but s5 does NOT.
If partners are content with agents act then if they have given ‘actual; express or implied authority to bind the firm, the firm will be bound. Even if not, they can ratify it afterwards
If partners are NOT content
- S5 provides that firm may be bound in certain circumstances, protect third parties and with the third party’s view of what is happening.
- S5 is the first place to look but does not displace application of common law agency entirely.
- Possible to conclude in situations that the firm is not bound under statute, but the particular facts may mean partner did have apparent authority at common law to conclude the contract
o Following s5 – a partners unauthorised act WILL bind if viewed objectively that
o The act is for carrying on business of the kind carried on by the firm. AND
o The act for carrying on such business in the usual way. It’s expected that kind of contract could signed by one person.
- Not be bound if:
o Third party actually knew not authorised
o Or did not believe they were a partner
Pattern who binds firm without actual authority may be liable to the other partners for breach of contract.
Power of a non-partner to bind against partners wishes – apparent authority at common law
- If not a partner only common law rules of agency apply.
- Apparent authority – arises when the firm represents or permits a representation to be made to a third party that a person has authority to bind the firm. The firm is then bound. If the person has been held out as a partner, then they have apparent authority.
Taxation of partnerships?
Each partner is liable to tax as an individual on their share of the income or gains of the partnership.
- Even though not a separate legal entity – HMRC requires a partnership to make a single tax return of its profits which must be agreed with HMRC.
- Income tax paid by each person.
- Capital gains tax normal capital gains tax principles apply on disposal of a capital asset by a partnership.
The partnership agreement?
The partnership agreement can be varied at any time with their unanimous consent.
Commencement and duration
Partnership name and place of business
- Partnership property
o Each partner is deemed to own a share in property belonging to the partnership
o S20 – all property is partnership property
o S21 – all property brought with money belonging to the partnership is deemed to have ben brought on account of firms unless contrary intention is shown
o Question of fact - Capital, profits and losses
o Default provisions is that all partners are entitled to share equally in capital and profits of the business.
o Extremely important to have an express provision in agreement - Drawings/ salary
o Should set out how much each partner should draw in any given period. May agree to receive a salary in addition to income profit share.
o Otherwise as per s24 – not entitled to salary unless stated - Duties, powers and restrictions on partners
o Under PA 1890 each partner may take part in management of partnership business but are not required to do so.
o Should expressly deal with decision making and management. All decisions must be by majority other than these which require unanimity - Expulsion
o A partner cannot be expelled by majority unless all of partners have previously expressly agreed that a majority can do this.
o Thus, should expressly agree on what is needed to remove. - Partner leaving
o If silent on matter, then it means a partnership is dissolved if one leaves
o In most cases this is a technical dissolution – a new partnership is formed by remaining partners who continue the business.
Dissolution of a partnership?
- Automatic
- Expiry of fixed term
- Completion of specific venture
- Death or bankruptcy of any partner
- By dissolution of partnership by notice: - where there is no fixed duration
- If partnership becomes unlawful
- By court
Limited liability partnerships?
Flexibility of a partnership with added advantage of limited liability for its members. It does have a legal personality.
Useful for investment structures as LLPS are tax transparent, so allow a high level of participation in management by the members.
Formation of an LLP?
- Two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP.
- Registration at company’s house – fill out form LLIN01 – which states companies name, registered office address and which are designated members
- Certification of incorporation
- Continuing registration regime – obliged to report to companies house any change of name, office, membership, creation of charge, annual confirmation statement and accounts.
Members in a LLP?
- Must have at least two formally appointed members at all times
- At least two members must be designated members – their obligations include amongst other things – signing the accounts on behalf of the member, making appropriate filings at company’s house
- S4 LLPA states that a member will cease to be a member upon:
- Their death
- Agreement with other members of LLP
- Giving notice to other members
- Dissolution
LLP members agreement?
LLP have not articles and the regulations do not set out any particular management structure. Therefore, it’s necessary to have an LLP members agreement.
- This is a private document that sets out formal procedures
- In absence of any such agreement 2001 regulations contains eleven n default provisions, BUT ANY GAPS WILL NOT BE FILLED BY PARTNERSHIP ACT.
Default provisions
- Member must share equally in profits
- An LLP must indemnify members for payments made and personal liabilities incurred by them in ordinary and proper conduct of the business
- Every member may take part in management
- No member is entitled to remuneration
- No person can become a member without consent of ALL existing members
- Ordinary decision making made by majority, any proposed change to nature of LLPs business requires consent of ALL
- Each member must give true accounts and full information
- If a member without consent carries on any business they must account and pay over all profits made to the LLP.
- Every member has a duty to account for benefits derived for transactions
- No implied power of expulsion by majority unless the members have provided for such
Tax in a LLP?
- It’s treated as a partnership
- LLP Is not taxed but partners are
- Assets held by the LLP will be treated as being held by the members as partners for capital gains tax purposes. Accordingly, a disposal of an LLP asset, such as land, will be regarded by HMRC as a disposal by the members of the LLP while it is trading.
- The LLPA gives relief from stamp duty where a partnership is incorporated as an LLP and assets of the partnership business are transferred to the LLP, subject to strict tax avoidance conditions. In some circumstances, stamp duty and/or SDLT is payable on the transfer of an interest in an LLP at the relevant rate
Characteristics of a LLP?
Separate legal personality
Limited liability for all memebers
File accounts at companies house - loss of financial privacy
Can create a floating charge overs assets UNLIKE PARTNERSHIPTS.
Some provisions of company law and insolvency apply.
