Partnerships Flashcards
What are incorporated businesses?
Corporate bodies
What are the advantages of a sole trader?
- control
- profit retention
- private data
- specialist
- personal
- no legal requirements
What are the disadvantages of a sole trader?
- liability
- finance / expansion
- economies of scale
- decision making
Arguments for a sole trader admitting a partner?
- access to new funding
- access to expertise
- access to new markets
- less responsibility (time, liability, decision making)
Arguments against a sole trader not admitting a partner?
- increased formality and disclosure
- profit share
What is the definition of a partnership?
“Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”
Types of partnerships
What is a general partnership? (Partnership Act 1890)
- general partners
- all of the partners share equal rights & responsibilities in the management of the business
- each individual partner assumes full responsibility for all of the business’s debts and obligations
Types of partnerships
What is a Limited Partnership (Limited Partnership Act 1907)?
general partners (at least 1)
- full personal liability for the business’s debts and obligations
- has / have right to manage and control the business
limited partners
- his / her liability is limited to his / her investment in the business
- does not participate in the day-to-day management of the business
Types of Partnerships
What is a Limited Liability Partnership (Limited Liability Partnership Act 2000)?
- all partners have limited liability
- combines characteristics of partnerships and corporations
What are the main features of a partnership?
- Contractual relationship (relationship of utmost good faith)
- Separate Legal Persona (in Scotland)
- At least two individuals, no maximum
- Main purpose is to make profit
- Members of partnership contribute: money, time, skills
What is a separate Legal Persona?
- can enter into contracts with third parties in its own right
- can raise a legal action in its own name
- it can be sued by a third party in the event of a legal dispute
- it can own property
- it can commit delicts
-BUT not elsewhere in the UK (A partnership is not a persona in law; a partnership is an aggregate of its members.)
Who are partners in a partnership an agents of?
-the business and each other
The partner bind the firm into a contract with a third party.
Creation of a Partnership
- members do not have to comply with any formal legal requirements
- the partnership does not have to be registered with the Registrar of Companies
Creation of a partnership
Types of contract
- expressed (written or verbal) or
- implied by the actions / behaviour of the parties / members
- by holding out _ Hosie v Waddell (1866)
Creation of a Partnership
What happens if there is no written agreement?
-the court can use the rules contained in the Partnership Act 1890 to resolve any problem, dispute
BUT … Partnership Act 1890 only provides guidelines → the partners are free to ignore it & the courts have to respect this decision
What details can be included in Partnership agreements?
- nature of the business
- the name of the business
- provisions for disputes between partners
- capital to be contributed by each partner
- interest* to be paid on capital before the profits are shared
- salaries to be paid to partners
- profit sharing ratios
- interest* to be charged on partners’ drawings
- limits on drawings
- admission of new partners
- retirement of existing partners
*if any
Naming a partnership
-may use the words “and Company” / “and Co”
-may trade under the names of the individual partners
OR
may trade under a collective name
The names and addresses of the partners must be displayed
on the business premises AND
on the firm’s letters and business documents
-is not required to register the name but subject to disclosure requirements of S.1200-S.1208 of the Companies Act 2006 if the partnership uses a name other than the surnames of each partner
What are partnerships not aloud to be named as?
prohibited to use “limited” / “Ltd”
Does a partnership exist?
How do you know if someone is a partner of a business?
IF an individual is entitled to a share of the profits of the business, this may be used in evidence to prove that he is a partner in a firm
Does a Partnership exist?
A person is not regarded as a partner when?
1) owning property jointly or in common does not itself create a partnership, even where profits from its use are shared
2) sharing of gross returns does not itself create a partnership
3) parties may share profits without being partners
-a loan provider where interest varies with profit
employees
-a widow or dependent of a deceased partner
-a seller of goodwill
Fiduciary duties (relationship of trust) (S.28-30)
The duty to disclose (S.28)
- keep proper accounts
- inform fellow partners about matters which may affect the firm
Fiduciary duties (relationship of trust) (S.28-30)
The duty to account (S.29)
inform fellow partners of any profit made or benefit received as a result of his position as a partner or as result of using the firm’s property / assets, name, contacts, business connections
Fiduciary duties (relationship of trust) (S.28-30)
The duty not to compete (S.30)
profit made by competing business (without permission by his fellow partners) have to be handed over to the firm
Rights & Duties (S.24)
Unless the partners have a different agreement among themselves what must all partners do?
- can expect to share equally in the profits that a partnership makes
- are expected to contribute equally towards any losses that the firm may suffer
- are expected to share equally the partnership funds or capital
- are entitled to receive interest on money loaned to the firm (5%)
- have the right to participate in the running of the partnership
- have the right to be indemnified by the firm for any liabilities incurred or payments made in the course of the firm’s business
- must first agree before any new partner can join the partnership
Rights & Duties (S.24)
What happens when a new partner is admitted?
- must first agree before any new partner can join the partnership
- the partners can reach a decision by majority vote … BUT … any changes to the nature of the partnership agreement must be agreed by all of the partners
Rights & Duties (S.24)
Partnership books
- need to be kept at the partnership’s head office
- all partners are entitled to have access to and inspect & copy of them
Expulsion of a partner (S.25)
- generally, majority partners are not permitted to expel one of their fellow partner from the firm UNLESS
- this power is part of the contract of partnership (partnership agreement)
What are the types of liability of the partners?
-Joint and Several Liability / Unlimited & equal liability …
BUT …
- Vicarious liability of the firm for delicts / negligent acts committed by the partners while acting in the course of the partnership business
- partner injures third party / damage, loss is caused to third party → the firm is liable
- partner causes loss or injury to a fellow partner → the firm is not liable
Liability of the partners
Partnership by holding out
- IF individual claims to be a partner in a firm or he allows third parties to believe that he is a partner → he will be liable to any creditor who has loaned the firm money on the strength of these claims
- IF the partnership let third parties believe that an individual is a partner → the partnership will be liable for any debts incurred or wrongful act committed by the false partner … EXCEPT … the third party knows ….
Liability of the partners (S.17)
Incoming Partner
-Liability of an incoming partner for debts or wrongful act
not responsible for any … occurred before their involvement in the firm
Liability of the partners (S.17)
Liability of a retired partner
-Liability of a retired partner for debts or wrongful acts
partner who has left the firm will cease to have any responsibility for business liabilities after his departure;
… BUT…
- he has to publicise his departure from the firm in the Edinburgh Gazette (giving proper notice to third parties of his changed role in relation to the business)
- has to ensure that individual notice is given to existing business partners of the partnership
- owes no responsibility to someone who had neither dealing with the partnership nor previous knowledge of his / her membership
- continue to be liable for … occurred during their involvement with the firm
Termination of a partnership (S. 32 to 35)
1) End of fixed term
continuing in business → partnership at will
2) Goal accomplished
3) Notice given / Due notice
-must be written if the partnership agreement is in the form of a deed
verbally
-notice will take effect when all partners have knowledge of it
-no particular period of notice is required
4) By mutual consent
Termination of a partnership (S. 32 to 35)
Continued
5) Death of a partner
6) Bankruptcy of a partner
7) Circumstances that make the partnership illegal
8) Private debt
9) Order for dissolution by the court
- a partner suffers from some mental disorder or insanity / permanent incapacity
- a partner persistently commits a breach of the partnership agreement
-the business can only be carried on at a loss etc.
when it is just and equitable
10) The appointment of a judicial factor
11) Rescinded on the grounds of inducement by fraud or misrepresentation
Dissolution of notice
A dissolution by notice may be prevented by the provision of the partnership agreement. e.g. Moss v Elphick (1910) where the partnership agreement stated that dissolution could only be occur if all the partners were in agreement.
Termination of a partnership
Authority of the partners after the termination of partnership
partners can’t enter into contracts with third parties
BUT … residual authority (limited!) in order to conclude the affairs of the firm
Termination of a partnership
Treatment of Assets
Partnership property and assets (disposed: sold to external parties or taken by partner(s)) used to
- pay off the firm’s debts & liabilities
- pay back any loan / advances (amount above and beyond the capital) provided by a partner
- pay back the contribution of the partners towards the firm’s capital
- anything remains of the firm’s capital or assets shared between the partners according to the rules by which they share profits
Termination of a partnership
Treatment of Assets
What happens if assets are insufficient?
IF the assets are insufficient to meet debts, partners’ advances and capital repayments, the deficiency has to be made good
- out of any profits held back from previous years
- out of Partners’ capital
- by the partners individually in the proportion to which they were entitled to share in profits
Termination of a partnership
Rights of outgoing partner (S.42)
- right will arise where the surviving partners
- have continued to trade using the assets and capital of the business &
- have failed to make a final settlement of the accounts
Termination of a partnership
Rights of outgoing partner (S.42)
What does the partner receive?
- a share of any profits attributable to his partnership share or
- receive interest at the annual rate of 5% in respect of his share
The Scottish and English Law Commissions’ Joint Report on Partnership Law (November 2003)
new Partnership Act was recommended to replace the existing 1890 Act – not implemented
proposed changes
- having the same general rules governing partnerships in Scotland, England and Wales - partnerships in
- England and Wales would become legal entities – not implemented
- partnerships would not automatically be wound up when there is a change of partners – not implemented
- remove maximum number of members (20 members) – adopted
