Partnerships

Question 1

What is a Partnership?

Answer 1

A relationship between at least two persons, legal or natural, carrying on a business in common with a view to making a profit.

Partnership Act (“PA”) 1890 — s. 1(1).

This arises regardless of intention. Evidence of profit sharing and collective decision-making are strong indicators of a partnership.

Question 2

Does a Partnership have Limited Liability?

Answer 2

No, for it has no legal personality.

Question 3

What is a Limited Liability Partnership?

Answer 3

A Partnership with distinct legal personality.

Question 4

What are the Commercial Advantages of a Partnership?

Answer 4

• Pass-through taxation.
• Greater confidentiality.
• Limited liability (for LLPs).
• Greater organisational flexibility.
• Fast, simple, and cheap formation.

Question 5

How is the Relationship between Partners classified?

Answer 5

Fiduciary.

PA 1890 — s. 28-30.

Question 6

What is the nature of Partners’ liability in Contract and Tort?

Answer 6

• In Contract, Partners are jointly liable.
• In Tort, Partners are jointly and severally liable.

PA 1890 — ss. 9-12.

A new Partner will not automatically be liable in relation to debts incurred by the Partnership before joining. A retired Partner will still be liable in respect of debts incurred by the partnership during their tenure.

Question 7

What must a Retiring Partner do to avoid Liabilities arising following their departure?

Answer 7

• Provide actual notice to any Party they have dealt with; and
• Provide constructive notice to all by virtue of publicising their departure in the London Gazette.

PA 1890 — ss. 36.

A former Partner will not be liable for debts to any third party who did not know them to be a Partner before they left.

Question 8

When may a Non-Partner be held Liable for a Partnership’s obligations?

Answer 8

When they hold themselves out as a Partner or knowingly allow themselves to be so held out.

PA 1890 — s. 14.

The elements are:
* A representation to a third party to the effect that a person is a partner;
* The third party’s honest belief in the representation; and
* The third party’s commercial reliance on the representation.

Question 9

When can a Partner bind a Partnership?

Answer 9

• At any time in the course of business; unless
• They are unauthorised on a particular issue; and
• Their counterparty either knows this or does not know or believe them to be a Partner.

PA 1890 — s. 5.

Question 10

When can a Non-Partner bind a Partnership?

Answer 10

When they have actual, express, implied, or apparent authority to bind the Firm.

Question 11

What is a Partnership Agreement?

Answer 11

The document governing how the Partnership will be run.

At a minimum, this includes provisions on:
* Commencement and duration.
* Partnership name and place of business.
* Partnership property.
* Capital, PNL sharing and ratios.
* Drawings / Salary.
* Remuneration.
* Accounts.
* Dissolution of the partnership, automatic and otherwise.
* Duties, powers and restrictions on partner.
* Work input and roles.
* Limits on the authority of partners.
* Partnership decision making.
* New partners.
* Retirement / expulsion of existing partners.
* Non compete / other restrictions.

Question 12

What are the Default Provisions governings Partnerships?

Answer 12

• S. 20: All property brought into the Firm on its account or in the course of business is Firm Property, and each Partner is deemend to own an equal share in Firm property.
• S. 21: All property bought with the Firm’s money is deemed to be Firm Property, unless the contrary is shown.
• S. 24(1): All Partners are entitled to share equally in the Firm’s capital and profits, and to contribute equally towards its losses.
• S. 24(5): Every Partner may take part in the Firm’s management.
• S. 24(6): No Partner is entitled to remuneration.
• S. 24(7): No person may be introduced as a Partner without unanimous consent.
• S. 24(8): Ordinary decision-making is by majority vote of Members, but proposed changes to the nature of the Firm’s business requires unanimous consent.
• S. 25: No Partner may be expelled without unanimous consent.
• S. 26: Where no fixed term has been agreed for Partnership, it will be dissolved by any Partner leaving.
• S. 30: If a Member, without consent, commercially competes with the Firm, they must account for any and all profits.
• S. 44(b)(3): Upon dissolution and after all debts are settled, remaining assets will be distributed according to initial contribution, then equally.

PA 1890.

Question 13

What are the Default Provisions governings LLPs?

Answer 13

• R. 7.1: Members share equally in capital and profits.
• R. 7.2: An LLP must indemnify its members for payments made and personal liabilities incurred in the proper course of business.
• R. 7.3: Every Member may take part in management.
• R. 7.4: No Member is entitled to remuneration for managing the Firm.
• R. 7.5: No person can become a Member or Assign membership without unanimous consent.
• R. 7.6: Ordinary decision-making is by majority vote of Members, but proposed changes to the nature of the Firm’s business requires unanimous consent.
• R. 7.7: The Firm’s records must be availble for inspection by the Members at its registered office.
• R. 7.8: Each Member must give true accounts and full information of all things affecting the Firm to any other Member or their legal representative.
• R. 7.9: If a Member, without consent, commercially competes with the Firm, they must account for any and all profits.
• R. 7.10: Every Member must account for benefits derived from transactions with the Firm and its business or property.
• R. 8: Members cannot be expelled by majority vote unless expressely provided for in the Partnership Agreement.

The Limited Liability Partnerships Regulations (“LLPR”) 2001.