Partnerships

Question 1

How is a partnership formed?

Answer 1

When there is a relationship between persons carrying on a business in common with a view to making profit.

Requires at least two people (includes legal and actual persons)

Question 2

What are the indications of a partnership being formed?

Answer 2

• partnership agreement (conclusive)
• evidence of profit sharing
• if all individuals take part in decision making
• a loan of money by one party to another does not create a partnership

Question 3

What are the disadvantages of traditional partnerships?

Answer 3

• legislation governing partnerships are outdated and unsuited to modern business
• no limited liability

Question 4

What are the advantages of traditional partnerships?

Answer 4

• no set up costs
• no required formalities
• no filing or disclosure requirement
• high level of privacy

Question 5

What is the relationship between partners?

Answer 5

There is a fiduciary relationship - an overriding duty of good faith in a partnership

Question 6

What evidence is there of the fiduciary relationship between partners in the 1890 Act?

Answer 6

• honest and full disclosure (s 28)
• unauthorised personal profit (s 29(1))
• conflict of duty and interest (s 30)

Question 7

What is the liability of partners?

Answer 7

Partners are personally liable as the firm has no separate legal personality

Question 8

What is the liability of partners in contract?

Answer 8

Partners are jointly liable

Question 9

What is the liability of new partners?

Answer 9

New partners are not automatically liable for debts incurred before they joined the partnership.

Question 9

What is the liability of partners in tort?

Answer 9

Partners are jointly and severally liable

Question 10

What is the liability of partners after they retire?

Answer 10

They will still be liable for debts incurred by the partnership whilst they were a partner.

Question 11

What must partners do to relieve a retiring partner of their liability?

Answer 11

They must novate the relevant agreement with consent of the creditor.

Question 11

When will former partners be liable for debts incurred after they have left?

Answer 11

Can still be liable if a third party believes they are still a partner

Question 12

How do former partners avoid being liable after they leave the partnership?

Answer 12

Providing notice to third parties that they are no longer a partner. Either actual notice (for those who had actual dealings with the partner) or constructive notice by publishing departure in the London Gazette (for those who did not have dealings with the partner).

Question 13

When will a non-partner be liable for partnership debts under statute?

Answer 13

Generally never.

Exception - when they have held themselves out as a partner (or have knowingly allowed themselves to be held out).

Requires:

• Representation to third party to effect that person is a partner
• third party’s action in response (eg giving credit to firm)
• third party believes they were a partner

Question 14

When do contracts bind the firm?

Answer 14

• when the person forming the contract has actual, express or implied authority to act
• if no authority, where partner’s ratify the agent’s act and adopts the contract - expressly or can be done by performing the contract
• section 5 - unauthorised act by partner will be binding if (i) it is the act is the kind carried on by the business of the firm and (ii) the act is for carrying on the business in the usual way (will not be bound if third party knew partner in question was not authorised or if they did not know they were a partner)
• if apparent authority under common law applies. Requires the firm to represent or permit representation to third party that a person has authority to bind the firm and third party to rely on it, for firm to be bound.

Question 15

How are partnerships taxed?

Answer 15

Partnerships are tax transparent meaning partners are taxes as an individual on their share of profits (income tax) or gains (CGT)

Question 15

How are the mutual rights and obligations of a partnership governed?

Answer 15

By the provisions in the 1890 Act unless there is a partnership agreement.

Question 16

What limitations are there on a partnership name?

Answer 16

Cannot include anything that suggests it is public or private company, an LLP, an existing trademark, sensitive word or expression, anything that suggests it a connection with government without permission.

Question 17

What is the default position with partnership property?

Answer 17

All property brought into the partnership is partnership property and all property bought with partnership money is deemed to be partnership property.

Question 17

What is the default position in relation to sharing income and capital?

Answer 17

Income and capital is to be shared equally between the partners

Question 18

What is the default position in relation to salaries?

Answer 18

No partner is entitled to a salary.

Question 19

What is the default position in relation to management?

Answer 19

Every partner may take part in the management of the partnership.

Question 20

What is the default position in relation to decision making?

Answer 20

All decision making must be decided by majority other than which requires unanimity:

• changes to the nature of the partnership business
• introducing a new partner
• varying the rights and duties of partners

Question 21

What is the default position of introducing new partners?

Answer 21

Consent of all partners is required.

Question 22

What is the default position of excluding a partner?

Answer 22

Consent of all parties is required unless previously expressly agreed that a majority can do this.

Question 23

What is default effect of partner leaving?

Answer 23

Technical dissolution - a new partnership is formed by the remaining partners who continue the business.

Question 24

Are partners allowed to compete with the firm?

Answer 24

Not whilst they are a partner, unless expressly agreed otherwise.

After they leave the firm, default position is there is no requirement not to compete.

Question 25

How is a partnership dissolved under the default provisions?

Answer 25

Automatic dissolution on expiry of fixed term, completion of a specific venture, death or bankruptcy of any partner.

By notice from any partner.

If the partnership business becomes unlawful.

By the court as a last resort.

Question 26

How are assets distributed on dissolution of a partnership under the default provisions?

Answer 26

Debts and liabilities have been paid first.

Then each partner receives back the share of capital they put in initially.

Then any surplus is distributed equally between the partners.