Partnership

Question 1

What is required for a partnership to exist under Section 1 of the Partnership Act 1890?

Answer 1

A partnership exists when two or more persons carry on a business in common with a view to profit. This requires:

1. Carrying on a business: A continuous series of activities rather than isolated actions.
2. In common: Joint activity by the parties rather than separate efforts.
3. View to profit: The intention to make profit, regardless of whether profit is achieved.

Question 2

What rules does Section 2 of the PA 1890 provide for determining the existence of a partnership?

Answer 2

Section 2 states:

1. Sharing of gross returns does not, by itself, create a partnership.
2. Receipt of a share of profits is prima facie evidence of a partnership, but not conclusive.
3. Other factors include:
   * Participation in decision-making.
   * Names on title deeds of property.
   * Methods of profit sharing.

Question 3

What is the relationship between the default provisions of the PA 1890 and a partnership agreement?

Answer 3

The PA 1890 provides default terms that apply unless overridden by a partnership agreement. Agreements can be:

1. Written, oral, or implied by conduct.
2. Specific terms in an agreement often override PA 1890 provisions.
3. Some provisions of the PA 1890, like sections 1 and 2 (existence of a partnership) and sections 5–18 (relations with third parties and in particular, liability for debts), cannot be overridden.

Question 4

Why is it beneficial to seek legal advice when starting a partnership?

Answer 4

Legal advice ensures:

1. Awareness of default terms in the PA 1890.
2. Creation of a written agreement to prevent disputes.
3. Drafting of specific provisions for roles, profit-sharing, and dispute resolution.

Question 5

What default rules does the PA 1890 provide for decision-making in partnerships?

Answer 5

Section 24 states that:

1. Decisions are taken by majority vote, except for:
   
   • Changing the nature of the business.
   • Introducing a new partner.
   • Amending the partnership agreement.

These require unanimous agreement.

2. Partners may delegate decision-making authority for efficiency.

Question 6

How does the PA 1890 address dissolution of a partnership?

Answer 6

Under the PA 1890, a partnership dissolves:

1. Automatically due to:
   
   • Death or bankruptcy of a partner (s 33).
   • Expiry of a fixed term (s 32).
   • Illegal continuation of the business (s 34).
2. By notice: Any partner can give notice to dissolve (s 26).
3. Court order (s 35): Grounds include incapacity, prejudicial conduct, persistent breaches, or ongoing losses.

Question 7

What provisions should be included in a partnership agreement to handle financial matters?

Answer 7

Key financial provisions include:

1.	Capital contributions: Initial amounts and obligations for future contributions.
2.	Profit and loss sharing: Allocation of income profits and capital profits.
3.	Drawings: Limits on the amount partners can withdraw periodically.
4.	Ownership of assets: Clear terms regarding individual versus partnership-owned assets.

Question 8

What are the implications of goodwill in a partnership?

Answer 8

Goodwill represents the partnership’s reputation and client relationships. Key points include:
1. Goodwill is valuable when selling the partnership as a going concern.
2. It is challenging to value but often estimated at two years’ profit.
3. Partnership agreements should specify how goodwill is treated during dissolution or sale.

Question 9

What does Section 24 PA 1890 state about partner duties and responsibilities?

Answer 9

Partners must:
1. Share losses and profits according to their agreement.
2. Indemnify partners who bear excessive liabilities or expenses.
3. Operate with fairness and good faith.
4. Account for private profits derived from partnership-related transactions.
5. Avoid competing with the partnership business without consent.

Question 10

How can partnership agreements address disputes?

Answer 10

Dispute resolution clauses often include:

1. Requirement to use arbitration or alternative dispute resolution (ADR).
   
   2. Specification of matters suitable for ADR, such as contract interpretation.
   3. Steps for escalating unresolved disputes to formal court processes if needed.

Question 11

What are restraint of trade clauses, and how are they used in partnership agreements?

Answer 11

Restraint of trade clauses restrict former partners’ activities to protect the business. Types include:

1. Non-compete: Prevents competing with the partnership.
2. Non-solicitation: Stops soliciting partnership clients or employees.
3. Non-dealing: Prohibits contracts with clients/employees, even if approached by them.

Question 12

What are the default rules for distributing proceeds after partnership dissolution under Section 44 PA 1890?

Answer 12

Proceeds are distributed as follows

1. Pay off creditors.
   
   2. Repay loans made by partners, with interest.
   3. Return capital contributions to partners.
   4. Distribute any surplus among partners based on the partnership agreement.

Question 13

How can partnership agreements address partner expulsion?

Answer 13

While Section 25 PA 1890 requires express agreement for expulsion, agreements can include:

1. Conditions for expulsion (e.g., misconduct or underperformance).
2. Procedures for voting on and implementing expulsion.
3. Terms for buying out the expelled partner’s share.

Question 14

Under the PA 1890, what provisions should a partnership agreement include regarding partners’ work input, and why?

Answer 14

• The PA 1890 allows partners to manage the business but does not require them to do so.
• The partnership agreement should clearly specify:
  1. Working hours or a requirement for full-time commitment to avoid disputes.
  2. A clause ensuring partners devote their full time and attention to the business.
  3. A restriction on partners engaging in other businesses to prevent distractions.
  • Non-compete clauses may be included or are implied by default under the PA 1890.
  • The agreement should also address holiday entitlement, sickness, and maternity/paternity leave, as these are not covered by the PA 1890.

Question 15

How are capital, profits, and losses shared among partners under the PA 1890, and how can the partnership agreement modify these defaults?

Answer 15

1. Default Provisions (PA 1890):
   
   • Partners share capital, income profits, and losses equally, regardless of their contributions.
   • Capital profits: One-off gains, like property value increases.
   • Income profits: Recurring earnings, like trading profits or rent.
   2. Modifications via Partnership Agreement:
      * Partners may agree to share capital and capital profits in proportion to their contributions.
      * The agreement may also:
      * Pay interest on capital contributions to reward and encourage investment.
      * Allocate income profits based on working hours or contribution to the business.
   3. Loss Sharing:
      * The default is equal sharing of losses.
      * The agreement should specify if salaries or interest on capital will still be paid in case of losses.

Question 16

Under what circumstances is a firm liable for contracts made by its partners according to Section 6 of the PA 1890?

Answer 16

The firm is liable when:

1. The contract or deed is made in the firm’s name.
2. The partner acted with actual authority or apparent authority.

• Express actual authority: Explicit permission from other partners to act on behalf of the firm.
  
  • Implied actual authority: Arises when:
  • A partner consistently performs certain actions without objection from other partners, or
  • A partner undertakes tasks implied by their role in the ordinary course of the firm’s business.

Question 17

What is apparent authority, and how does it differ from actual authority under Section 5 PA 1890?

Answer 17

Apparent authority arises when a partner’s actions appear authorized to a third party, even if not actually authorized. The firm is liable if:

1. The transaction relates to the type of business the firm conducts.
2. A partner would ordinarily be expected to have authority for such a transaction.
3. The third party is unaware the partner lacks authority.
4. The third party reasonably believes they are dealing with a partner.
   • Key Tests:
   • Objective test: Whether the transaction aligns with the firm’s type of business.
   • Subjective test: Whether the third party’s belief about the partner’s authority is reasonable.

Question 18

How does Section 10 PA 1890 address tortious liability in partnerships?

Answer 18

A firm is liable for torts (e.g., negligence) committed by a partner if:

1. The act or omission occurred in the ordinary course of the firm’s business, or
2. The partner acted with the authority of the other partners.

Question 19

What is the liability of partners for partnership debts under Sections 9 and 17 PA 1890?

Answer 19

Partners are:

1. Jointly liable for all debts incurred while they were partners.

• Creditors can sue one, some, or all partners for the full amount owed.

2. Jointly and severally liable for obligations arising from wrongful acts (torts) by a partner in the ordinary course of business.
3. A partner paying the full debt can seek contribution from other partners under the Civil Liability (Contribution) Act 1978.

Question 20

What is the purpose of a novation agreement, and how does it release retiring partners from liability?

Answer 20

A novation agreement:
1. Transfers liability for existing debts to the remaining or incoming partners.

2. Requires agreement between the creditor, the remaining partners, and possibly the incoming partner.
3. Releases the retiring partner from liability.
   • Limitations: Rarely used, as creditors prefer not to reduce the number of parties they can sue.

Question 21

What steps must a retiring partner take to avoid liability for future debts under Section 36 PA 1890?

Answer 21

A retiring partner must comply with specific notification requirements to avoid future liability. These include:

1. Actual Notice to Existing Creditors:
   * What is required: Direct communication with all existing creditors of the firm to inform them of the retirement.

• How this protects the retiring partner: Ensures creditors cannot rely on the assumption that the retiring partner remains liable for future debts.

2. Notice to the Public (Constructive Notice):

• What is required: Publish a notice of the retirement in the appropriate official Gazette:
• London Gazette for England and Wales.
• Edinburgh Gazette for Scotland.
• Belfast Gazette for Northern Ireland.
• Effect: Acts as notice to anyone who has not previously dealt with the firm, ensuring third parties are aware that the partner is no longer associated with the business.

3. Consequences of Non-Compliance:
   * Failure to provide actual notice to existing creditors means they may continue to treat the retired partner as liable for debts incurred after their retirement.

• If constructive notice is not published, new creditors (those who did not previously deal with the firm) may assume the partner is still active and hold them liable.

4. Exceptions:
   * No notice required:
   * If the partner leaves due to death or bankruptcy, no notification is necessary.

• In these cases, the estate of the deceased or bankrupt partner is not liable for future debts of the firm.

Question 22

What is “holding out,” and when does it create liability under Section 14 PA 1890?

Answer 22

Holding out occurs when:
1. A person represents themselves as a partner (or allows others to do so).
2. A third party relies on this representation and extends credit to the firm.
3. Liability applies even if the person was never a partner or had retired before the transaction.

Examples of holding out:
*	Being listed on the firm’s stationery, website, or promotional materials.
*	Acting in a way that implies partnership status (e.g., negotiating contracts for the firm).

Question 23

How can creditors enforce liabilities of a firm under the Civil Liability (Contribution) Act 1978 and the PA 1890?

Answer 23

Creditors may:
1. Sue the specific partner with whom they contracted.

• This partner can seek contribution from other partners for shared liability.

2. Sue any or all partners jointly, as all are liable for debts incurred while they were partners.
3. Sue the firm in its name, allowing enforcement against both partnership and personal assets of the partners.
   • The Civil Liability (Contribution) Act enables partners to seek equitable contributions from co-partners after paying debts.

Question 24

What happens if a partner cannot pay their share of a partnership debt?

Answer 24

If a partner cannot pay:

1.	Creditors can enforce the debt by seizing the partner’s personal assets or obtaining a charge over their property.

2.	Other partners may be forced to cover the shortfall and can then pursue the defaulting partner for reimbursement.

3.	The partnership agreement may include provisions for expulsion in cases of non-payment.

Question 25

How do insolvency and tax obligations impact partnerships under the PA 1890?

Answer 25

1. Insolvency

• No Separate Legal Personality: Partners are personally liable if partnership assets can’t cover debts.
• Winding Up: Partnerships can use rescue procedures (e.g., administration orders) or be wound up as unregistered companies.
• Bankruptcy: Partners risk losing personal assets; creditors can pursue them individually.
• LLPs vs Partnerships: LLPs offer limited liability, while general partnerships expose partners to full personal liability for debts.

2. Tax Obligations

• VAT: Partnerships exceeding the VAT threshold (£85,000 turnover) must register and file returns.
• Income Tax: Individual partners pay tax on their profit share via self-assessment.
• Corporation Tax: Corporate partners pay tax on their partnership profits.
• NICs: Partners pay Class 2 and Class 4 National Insurance Contributions.
• Capital Gains Tax: Applied to gains from selling partnership assets, divided among partners.

3. Practical Implications

• Insolvency Risks: Partners face personal liability for debts unless using an LLP structure.
• Tax Compliance: Accurate record-keeping and timely filings prevent penalties.

Question 26

How is a partner’s liability for partnership debts determined after they retire?

Answer 26

1. Was the debt incurred before the partner retired?
   
   • Yes:
   • Check for a novation agreement:
   • If yes: The partner is not liable.
   • If no: The partner is liable but may claim an indemnity from the other partners.
   • No:
   • Check if Section 36 notice requirements were complied with:
   • If yes: The partner is not liable unless they held themselves out as a partner.
   • If no: The partner is liable but may claim an indemnity from the other partners.

Question 27

What are Limited Liability Partnerships (LLPs) and how do they function?

Answer 27

LLPs, introduced under the Limited Liability Partnerships Act 2000 (LLPA 2000), are a hybrid between a partnership and a company, offering:

• Limited liability: Members are not personally liable for the LLP’s debts, except in specific circumstances (e.g., wrongful trading).
• Separate legal identity: The LLP is a corporate body distinct from its members.
• Flexibility: Combines the organizational simplicity of a partnership with the liability protections of a company.
• Commonly used in professional services (e.g., law firms, accountants) and joint ventures.

Question 28

What are the membership requirements for an LLP?

Answer 28

1. Minimum Members: At least two members at incorporation.
2. Designated Members:

• Minimum of two designated members responsible for administrative duties (e.g., filing accounts, appointing auditors).
• If there are only two members, both must act as designated members unless changed later.

3. Liability for Reduced Membership:
   * If membership drops to one for over six months, the remaining member becomes jointly and severally liable for any debts incurred during that period.

Question 29

How is an LLP incorporated and named?

Answer 29

1. Incorporation Process:
   
   • File Form LL IN01 with Companies House and pay the fee.
   • Unlike companies, an LLP agreement is not required to be filed.
   • Companies House issues a certificate of registration upon successful incorporation.
     2. Naming Rules:
   • The name must end with ‘LLP’, ‘Limited Liability Partnership,’ or their Welsh equivalents.
   • Names must comply with the Companies and Business Names Regulations 2009:
   • Must not be offensive or misleading.
   • Must not suggest government authority without approval.
   • The name must be displayed on business premises, stationery, and official documents.

Question 30

What are the powers and responsibilities of designated members in an LLP?

Answer 30

Designated members have duties similar to company directors, including:

• Filing annual accounts and confirmation statements with Companies House.
• Appointing, removing, and remunerating auditors.
• Notifying Companies House of changes in membership (e.g., joining or leaving members).
• Overseeing winding-up procedures in case of insolvency.
• Acting consistently with fiduciary duties, including reasonable care, skill, and good faith toward the LLP.
  Failure to fulfill these obligations can result in legal or financial penalties.

Question 31

What are the benefits and limitations of limited liability in LLPs?

Answer 31

1. Benefits of Limited Liability:
   
   • Members are generally protected from personal liability for LLP debts.
   • Members only risk losing their capital contributions and unpaid loans to the LLP.
     2. Limitations:
   • Members may still be liable for:
   • Fraudulent trading or wrongful trading (e.g., continuing to trade while insolvent).
   • Misfeasance (mismanagement of LLP assets).
   • LLP members may be disqualified under the Company Directors Disqualification Act 1986 for misconduct.

Question 32

What are the default rules under the LLP Regulations 2001 regarding capital, profits, and decision-making?

Answer 32

1. Capital and Profits:
   
   • Default: Members share equally in capital and profits.
   • Members can agree to vary this in the LLP agreement.
   • Losses are borne by the LLP, not individual members, as in a company.
2. Decision-Making:
   
   • Default: Ordinary matters are decided by majority vote.
   • Changes to the business’s nature or contracts between members require unanimous consent.
   • Members can create a custom management structure.

Question 33

How does membership change in an LLP?

Answer 33

1. New Members:
   
   • Must be agreed upon by existing members, usually governed by the LLP agreement.
   • Notify Companies House within 14 days using Form LL AP01 (individuals) or LL AP02 (corporates).
2. Departing Members:
   
   • A member can leave by giving reasonable notice to others.
   • Notify Companies House within 14 days using Form LL TM01 (individuals) or LL TM02 (corporates).
3. Expulsion and Bankruptcy:
   * Expulsion must be explicitly included in the LLP agreement, as it is not automatic.

• Bankruptcy of a member does not automatically terminate their membership unless the LLP agreement states otherwise.

Question 34

How do LLPs own property and manage liabilities?

Answer 34

1. Property Ownership:
   
   • The LLP, as a separate legal entity, owns property, not individual members.
     2. Granting Charges:
   • LLPs can issue debentures and grant both fixed and floating charges, unlike general partnerships, which can only issue fixed charges.
     3. Register of Charges:
   • LLPs must maintain a register of charges at their registered office.
   • The register must include details of all charges and be available for inspection by creditors and members.

Question 35

What advantages and disadvantages do LLPs offer compared to other business structures?

Answer 35

1. Advantages:
   
   • Limited liability for members.
   • Flexibility in management structure with fewer formalities than companies.
   • Ability to grant fixed and floating charges over LLP assets.
   • Suitable for professional services and joint ventures.
     2. Disadvantages:
   • Must file accounts and other details with Companies House, which become public.
   • More administrative and accounting requirements than general partnerships.
   • Subject to clawback provisions during insolvency, exposing members to some financial risks.