Partnership Flashcards
What is a partnership?
A partnership is a business structure formed where two or more people run and own a business together.
How is a partnership created?
It is created when the definition in s1 of the Partnership Act 1890 is satisfied. There are no further formalities required.
Is a written agreement required for a partnership?
There is no requirement for a written agreement, although it may be advisable to have one.
Can a partnership exist without intention?
A partnership will exist even if the individuals involved did not intend to create a partnership or are unaware of what they have created legally.
What does s1 of the Partnership Act 1890 define?
Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.
Who can be partners in a partnership?
Partners can be individuals or companies.
What is included in the definition of ‘business’?
The definition of ‘business’ includes ‘every trade, occupation or profession’.
What is required for a partnership to be formed?
There must be more than ‘mere agreement’ for a partnership to be formed.
Is actual trading required to establish a partnership?
There is no requirement for the parties to have actually commenced trading.
What was established in Khan v Miah regarding partnerships?
In Khan, a partnership was held to exist where the parties had agreed to open a restaurant together, even though they had not traded.
What is the definition of ‘business’?
The definition of ‘business’ includes ‘every trade, occupation or profession’ ($45, PA 1890).
What is required for a partnership to be formed?
There must be more than ‘mere agreement’ for a partnership to be formed.
Illot v Williams & Others [2013] EWCA Civ 645.
Is actual trading required for a partnership to exist?
There is no requirement for the parties to have actually commenced trading.
Khan v Miah [2000] 1 WLR 2123.
What steps did the parties in Khan v Miah take to establish a partnership?
The parties agreed to open a restaurant, opened a joint bank account, obtained a bank loan, and acquired premises.
What is the purpose of a business in a partnership?
The purpose of the business must be to make money. Charitable motives cannot constitute partnerships.
What is the legal personality of a partnership?
A partnership is unincorporated; it has no separate legal personality.
What are the implications of a partnership having no separate legal personality?
Partners will be personally liable for the debts of the partnership, and partnership assets are owned jointly by the partners.
What are the benefits of a partnership compared to a company?
Partners do not have to go through extensive administrative and accounting requirements, allowing them to focus on the business itself.
What is the requirement regarding public information for partnerships?
There is no requirement to make as much information public; partnerships are not required to publish business accounts.
What are the fundamental characteristics of a partnership?
Partnerships are not required to publish business accounts and partners have rights and responsibilities such as decision-making, profit sharing, and examining accounts.
Business Law & Practice, 13.2.2; 15.3
What rights do partners have in a partnership?
Partners have the right to be involved in decision-making, share in profits, examine accounts, insist on honesty, veto new partners, share losses, and indemnify fellow partners against excess liability.
s24(5); s2(3); s24(1); s24(2); s24(7)
How are decisions made in a partnership?
Decisions are made by majority vote, but changing the nature of the partnership requires unanimous consent.
s24(8)
What are the naming requirements for a partnership?
A partnership can be called anything the partners choose, subject to restrictions in Chapter 1 of Part 41 of the Companies Act 2006.
Chapter 1 of Part 41
What restrictions apply to partnership names?
Certain business names cannot be used without approval from the Secretary of State, especially those suggesting a connection to the Government or Local Authority.
Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulation 2014 (SI 2014/3140)
What is a Partner’s Duty of Utmost Good Faith?
Partners are under a duty of the utmost fairness and good faith to each other.
What must partners comply with according to s28 - 530 PA 1890?
Partners must comply with the following duties: divulge information, account for benefits, and account for profits from competing businesses.
What does the duty to divulge information entail?
Partners must divulge all information on ‘all things affecting the partnership’ to the other partners.
What is an example of breaching the duty to divulge information?
A partner sells their business premises to the partnership but suppresses information about the value of that premises.
Example of breach of duty.
What must partners account for regarding benefits?
Partners must account to the firm for any benefit derived, without the consent of the other partners, from a transaction concerning the partnership.
What happens if a partner does work for a client in their spare time?
The money received will be cash of the partnership unless the other partners consent to the individual partner keeping it.
What should be considered in problem questions regarding benefits?
Consider if the partner derived a benefit and whether this was with the other partner’s consent.
What must a partner account for if they run a competing business?
The partner must account for any profits made by the competing business unless they have the consent of the other partners.
What types of businesses are caught by the duty to account for profits?
This duty catches businesses in direct competition with the partnership.
Does the duty to account include similar but non-competing businesses?
No, it does not necessarily include similar, but non-competing businesses, such as a partner setting up a business in a different part of the supply chain.
What does the Partnership Act 1890 provide?
The Partnership Act 1890 provides a default set of rules that apply to partnerships where there is no express or implied agreement to the contrary.
Why might the default rules of the Partnership Act not be appropriate?
The default rules may not be appropriate for every partnership, and they are not necessarily comprehensive in what they cover.
What is often necessary for parties in a partnership?
It is often necessary for the parties to enter into an express written agreement that modifies or departs from the terms implied by the Act.
What key skill should students learn regarding the Partnership Act?
Students should learn what the PA 1890 implies in the absence of any agreement and what changes might need to be made by way of a written agreement to suit the needs of a client.
What is arbitration in the context of partnerships?
Arbitration is a form of alternative dispute resolution where the parties agree to submit any disputes to an independent third party (an arbitrator) who will make a binding decision on the dispute.
Why is it desirable to include an arbitration clause in a partnership agreement?
Including an arbitration clause can help resolve disputes between partners without resorting to litigation.
What is the significance of specifying a commencement date in a partnership agreement?
Specifying a commencement date is desirable to ensure certainty about when the parties’ rights and obligations arise.
When does a partnership come into being according to the Partnership Act?
The partnership comes into being when the statutory definition is satisfied.
What does the Partnership Act imply about dissolution?
The death or bankruptcy of a partner will automatically dissolve the partnership (s33).
Why is the automatic dissolution of partnership problematic?
It is normally desirable to provide that the remaining partners will automatically continue in partnership upon buying out the deceased/bankrupt partner’s share.
What is a potential limitation on partner drawings?
It may be desirable to place a monthly limit on how much each partner can draw from the business to prevent any one partner from draining funds.
What does the Partnership Act say about duration?
No duration is supplied by the Act; any partner may terminate the entire partnership at any time by giving notice to all other partners (s26).
What is a ‘partnership at will’?
If there is no agreement to the contrary, the partnership will be a ‘partnership at will’ (s26), meaning it continues indefinitely unless a partner gives notice to terminate.
What happens if a partner gives notice to terminate?
A notice to terminate under the Act has immediate effect and does not need to be in writing unless the partnership agreement is made by deed (s26(2)).
What are some suggested amendments regarding partner expulsion?
Suggested amendments might include specifying a minimum period of notice, requiring written notice, agreeing on a fixed term, or providing that the partnership continues as long as there are two surviving partners.
What may be desirable regarding expulsion of partners?
It may be desirable to provide a term enabling the partners to expel a partner in prescribed circumstances.
What does the PA 1890 say about expulsion of partners?
The PA 1890 does not provide for the expulsion of partners as long as there are two surviving partners.
What may be desirable in a partnership agreement regarding expulsion?
It may be desirable to provide a term enabling the partners to expel a partner in prescribed circumstances.
What does the PA 1890 imply about competition after leaving a partnership?
Nothing in the PA 1890 prevents partners from setting up in competition on leaving the partnership.
Why is it important to limit an outgoing partner’s freedom to compete?
Where the firm continues on a partner retiring, it is important to provide a term limiting the outgoing partner’s freedom to compete.
What must non-competition clauses do to be valid?
Such clauses must protect a legitimate interest and be reasonable to protect that interest.
What is an example of a legitimate interest in a non-competition clause?
The firm’s business connections, employees, or confidential information.
What factors make a non-competition clause potentially unreasonable?
If it is wider than it needs to be, such as restrictions lasting more than 3 years over an unduly wide area.
What are less burdensome alternatives to non-competition clauses?
Non-dealing clauses and non-solicitation clauses.
What does a non-dealing clause do?
It prevents the partner from entering contracts with customers.
What does a non-solicitation clause do?
It prevents the partner from soliciting contracts.
What must remaining partners do when a partner leaves the business?
The remaining partners will need to pay for that partner’s share, or otherwise this will need to be sold to an external third party.
What does the Partnership Act imply regarding a partner’s share?
5% interest on the partner’s share; or such profits as are attributable to their share ($42).
What are desirable terms to specify in a partnership agreement?
Terms should specify:
- Whether partners have an obligation or option to purchase an outgoing partner’s share;
- The basis on which the share will be valued;
- How to resolve disputes as to the valuation (e.g., professional valuation);
- The date on which payment will be due;
- An indemnity for the outgoing partner’s liabilities;
- Valuation of goodwill;
- A term enabling a partner to retire without unanimous agreement.
What rights do partners have regarding retirement under the Partnership Act?
Partners have no right to retire under the Act. However, partners can vary the partnership agreement (to remove a partner) by unanimous consent.
How do partners share capital in a business?
Partners share equally in the capital of the business. Increases or decreases in the value of assets are also shared equally.
Can partners deviate from equal sharing of capital?
Yes, partners may want to deviate from equal sharing to reflect the capital contribution of each partner to the business.
For example, if Partner A provides a factory worth £50,000 and Partner B puts in £10,000 cash, under the PA 1890, if the factory increases in value to £60,000, the increase of £30,000 is shared equally despite differing contributions.
